Penny Stock Brokers 4u

Just because something is cheap does not mean you should buy it. Would you buy a steak that was marked down to 25% of its original cost because it was 5 days past its expiration? How about a puzzle whose box is not sealed and is probably missing pieces? You probably wouldn’t get either one regardless of how cheap it was.  Clearly, price is not the only thing we base our purchase decisions on when it comes to most things we buy; yet every day people are fooled into buying penny stocks just because they are cheap without ever delving into why they are just a few cents per share.

There is a reason why penny stocks are cheap – it is because they are a terribly risky investment. Let’s face it; a 15 year old car that may stop running tomorrow is not going to fetch the same price as that spanking new off the assembly line beauty. And just as many people are leery to buy something new on the market because they are not sure if it is a lasting technology, so are many leery to buy shares in a new start-up company. So, if you are a company in your death throws trying to build some capital to keep open a bit longer, or a new company with no history to give validity to your strength, there is a good chance you are not going to be able to fetch a high price tag for your stock.

Ultimately, by investing in companies that are either weak or have no track record, you are going to pick some that fail and others that prosper. The main problem with penny stocks is that the largest percentage of them completely fails.   So why do people invest in them? One reason is the mentality is that they are “cheap.” When you see something that sells for $.10 per share it is easy to fall into the trap of thinking, “it is just a dime.” But whether you buy 10,000 shares at a dime or ten shares at $100, you still have $1,000 at risk.

Others will argue that you only have to hit one that explodes and it will outperform enough to cover your losses. To me that sounds much like a gambler that keeps going after they’ve lost their savings account only to lose their home too. Besides, the math doesn’t even work. If you lose everything 95% of the time and make a ten-fold profit 5% of the time, you still lose:

($10,000 * 95%*0) + ($10,000 * 5% *10) = $5,000

Thus you have only half of your original investment remaining; do it again and now you have only $2,500. I think anyone can see where this is headed. And when you consider that statistically only 1% of penny stocks will ever reap a ten-fold return, not 5%, then it is obvious such investments are unsound. If you want to be a gambler, you stand a better chance playing blackjack.

Therefore, if you are going to be an investor in the stock market you are going to have to learn to evaluate a stock’s value on much more than its price. You have to look at key financial indicators to evaluate the strength of the company and its potential for growth. There are many indicators, but here are a few of the more common ones:

• P/E Ratio – The Price/Earnings ratio is the current share price divided by its earnings per share; a higher P/E indicates a higher earnings growth than a lower P/E; however you should only compare companies within the same or similar industry
• PEG Ratio – The P/E to Growth ratio is obtained by taking the P/E ratio and dividing it by the earnings growth rate. The lower the PEG is the more undervalued the stock is.
• P/B Ratio – The Price to Book ratio is the current closing price of a stock divided by its most recent quarter’s book value per share. The lower the R/B ratio the more undervalued the stock is.

One of the problems with evaluating penny stock is that much of the financial information cannot be obtained in order to calculate these ratios. Penny stock traded on the Pink Sheets does not have to provide financial reports, and small companies fall under exemptions and thus do not have to register with the SEC or provide them with regular reports – hence another reason why many do not advocate investing in penny stocks. However, if you take the time to look, you will find that there are some shares trading below $5 per share and are listed on one of the major stock exchanges. These are going to be at least a little safer because it will be easier to perform your due diligence before buying them.

Remember, it is not a cheap penny stock that you are looking for; it is an undervalued one. While these terms are often used interchangeably, they have completely different meanings when it comes to evaluating stocks, especially penny stocks. Also, keep in mind that there is never a sure thing in the stock market regardless of what self-serving people will tell you. Always consider the potential for a hidden agenda when obtaining advice regarding stock as few penny stock advisors have only your best interests as their guide. Those that are touting the best penny stocks are often being paid by companies to promote their stock in order to drive the price up.

Do your own homework unless you are sure you have an advisor working only for you, and even then it pays to completely understand why a certain stock is being advised. While there are a few companies out there that research penny stocks and stay at arm’s length from those they recommend, far too many receive shares or a cash payment to recommend them.

And the best advice of all when it comes to penny stock investing is to only invest what you can afford to lose. Doing so will free you to enjoy the experience rather than fretting and making decisions based on emotion.