Business

The best penny stocks to buy now simply aren’t worth it

By: Dale Arasa - @inquirerdotnet

Inquirer Los Angeles / 08:34 AM October 28, 2021

If you’re looking for the best penny stocks to buy now, you might want to change your mind. Many investors frown upon investing in them because of the significantly high risks. Yet, a small-time investor might buy penny stocks because they’re cheaper than other stock exchange options. Yet, it’s not enough to compensate for their volatility.

Experienced traders could take advantage of its wild price movements with technical analysis. Still, they would need a lot of luck to secure profits from these assets. Even if you’re not investing in them, you should still learn about them. It will show you what a bad investment looks like, so you will be able to find the good ones!

First, we must elaborate on the definition of penny stocks. Then, we will go through the various reasons why it’s not a good idea to invest in them. We will also show you how to search and purchase them, so you can better understand why they’re highly risky. More importantly, we will talk more about the more promising alternatives to penny stocks.

What are penny stocks?

You might think penny stocks got their name because they’re worth pennies, but that’s just one of the well-known definitions. Thankfully, the SEC provides specific criteria:

Small companies issue them with a price lower than $5.00.
The firms issuing them have a market cap of less than $250 or $300 million. They are otherwise known as micro-cap stocks.
These are stocks traded in over-the-counter (OTC) markets, not in major exchanges like the NYSE and NASDAQ. The OTC markets include the OtC Link LLC and the OTC Bulletin Board.
It’s hard to determine their price because it’s difficult to get quotations.
They are highly illiquid, meaning you may find it hard to sell them. Even if you do, they might not fetch a high price.

Why you should think twice before investing

Microcap stocks, including penny stocks, may be more susceptible to price manipulation. These are the red flags to watch out for: https://t.co/1lP7nL8BpO

— SEC Investor Ed (@SEC_Investor_Ed) January 28, 2021

Read the criteria again, and you’ll see a couple of red flags. For example, you cannot pinpoint the exact prices and you may find penny stocks difficult to sell.

However, these aren’t the only reasons why it’s a bad idea to invest in penny stocks. We must also provide more details regarding the ones we’ve already mentioned.

If you check Inquirer USA articles often, you’ll know that we provide lists of the most promising assets. These include growth stocks, ETFs, mutual funds, and even cryptocurrencies.

Yet, we chose not to offer options for penny stocks because of their risks. Only veteran traders should even try them, and even they will need the uck to make money from these assets.

That’s why we will just list the many risks of penny stocks. It’s best to steer clear from these volatile shares if you’re not prepared to take them on the following:

Highly Volatile Price

Only a limited number of penny stocks are publicly available. As a result, the prices are highly influenced by demand. If many people buy them, the price could quickly rise.

The increase doesn’t have to be that high for investors to see gains. After all, they’re likely to buy several, so they could maximize profits despite incremental increases.

Unfortunately, this could work against the investor too. Let’s say the hype for their penny stock simmered down. As a result, the price dips significantly.

This causes the investor to hold stocks with a drastically lower value. As we said, that person will have a hard time selling those to cut losses, so they will likely waste money.

Read More: Investing For Dummies 101

Price manipulation

Penny stocks are a hotbed for numerous scams. If you’re not careful, someone could fool you into spending on a junk asset. Here are some of the common ones:

Email spam – You may get an email that will ask you to invest in a microcap company. It will tell you that you can start with a small amount, just like thousands of other investors.
Internet fraud – Scammers may pose as covert market insiders in online forums. They will claim to spill secrets about a promising company to entice potential investors.
Paid promoters – Others go one step further by posing as investment newsletters. Similar to the other scams, these blogs will inform you about a promising investment.
Cold calling – A small army of salespeople could gather in “boiler rooms” where they will call as many potential investors as possible.
Dubious press releases – Scammers may publish press releases that lie about one of the “best penny stocks”.

These scams are often part of a pump and dump scheme. They fool people into investing, so the stock price goes up. Then, they will sell all the shares, leaving the investors empty-handed.

Poor fundamentals

Talk to experienced investors and you may hear them talk about fundamentals. This is a shorthand for the various factors that a company with promising stock should exhibit.

For example, it should prove that it has been making money in the past. Many customers should be paying for its products and services as well.

However, these traits are more often found in long-standing companies like Amazon. Meanwhile, you may usually find the best penny stocks from startups.

This means you can’t be sure if these companies will earn a lot in the future. The one you picked could crash like the millions of other small businesses.

As a result, the performance of your penny stocks is shaky at best. This uncertainty is one of the biggest reasons why people stay away from these assets.

Unreliable promos

Penny stocks often come from new companies that not a lot of people know about. This means you may only find a few market analysts tracking their progress.

If you can’t get information from these folks, you’ll have to rely on the company’s promoters. Unfortunately, you’ll have to pay them to share info about the firm.

Worse, they provide details that were often selected by the company, leaving out any negative details. This is to make sure investors are likely to invest quickly.

The promos only last for a few days, and the hype surrounding the penny stock fades away. In turn, the price falls drastically, leaving investors with massive losses.

Not enough profits

This is the biggest reason why people steer clear of even the best penny stocks. They come from companies that are not always profitable.

Most of them only have a novel product or service and limited bank funds. These offerings are barely proven, and the companies may quickly run out of money.

You may not even see the stock price bump even a little bit. If not, you might have to wait a long time to yield some earnings per share. Let’s say the company of your penny stock shuts down.

You’ll have a hard time finding other investors who are willing to take those shares off your hands. In other words, you might not be able to cut your losses.

How can I look for the best penny stocks?

A trader in penny stocks has been arrested for allegedly running a social media pump-and-dump scheme. Prosecutors say he repeatedly lied to over 70,000 Twitter followers, getting them to buy stocks and allowing him to rake in over $1 million. https://t.co/LnzJt6jV8B

— The Associated Press (@AP) October 27, 2021

Let’s say you’ve decided to push through with investing in these assets. You’ve researched the best penny stocks to watch, and you’re willing to shoulder the risks.

Here’s how to do it:

See if your stock picks are registered with state securities regulators and the SEC.
Fully understand the company’s business model and its products and services.
Look for the most recent reports and financial statements that the company filed with the SEC. If it doesn’t file with the SEC, ask your broker for any related details. Note that the information you receive could be outdated or inaccurate.
Ask your state’s securities regulators about the people running that company. Find out if it ran into issues with investors and regulators.
Make sure your broker and their firm are registered with the SEC. What’s more, they should have a license to do business in your state.

Alternatives to penny stocks

You have so many investment options, so there’s no need for trading penny stocks. Instead, you might want to try these other asset classes:

Bonds – You could buy debt from the government or certain companies. These are known as bonds, and they could provide a steady flow of fixed-income. What’s more, they usually have fewer risks than other assets.
Exchange-traded funds – Otherwise known as ETFs, they’re made up of different types of assets. ETFs often stick to assets in a certain class or sector. They make it easier to diversify your portfolio, and they could yield decent returns.
Index funds – Similar to ETFs, they contain a variety of assets. However, index funds follow market indexes like the S&P 500 to match their performance.
Mutual funds – Instead of matching indexes, mutual funds aim to beat them.
Real estate – You may want to invest in residential or commercial properties. It’s best to choose your real estate investments based on specific market demand. For example, you might want to invest in homes when many people want to buy them. REITs let you diversify real estate investments easily, similar to ETFs.
Other stocks – You don’t need the best penny stocks when regular alternatives are better. The best stocks to buy are found in the most promising sectors. Unlike penny stocks, these are more likely to yield earnings. Click here for a list of our top stock market picks.
Digital real estate – People now invest in properties that exist in virtual worlds! Digital real estate may seem silly until you find out that people earn millions from it. Decentraland is one of the most popular spaces for digital real estate.
Cryptocurrencies – If you’re looking for a high-risk and high-reward, cryptos are the way to go! Bitcoin and other cryptocurrencies have been rising recently. They have the same if not more volatility than penny stocks, but they’re likely to perform well in the long term.

What Is A Bitcoin ETF?

What Is Automated Bitcoin Trading?

Final thoughts

Whether you’re investing in the best penny stocks or other assets, do your due diligence. Learn all you can about them before spending a dime. The other Inquirer USA articles can help you.

What’s more, you should check other resources such as online price charts and company websites. They could provide the real-time info you need to pick the best investments.

Note that this article is for informational purposes only. It’s up to you how you’ll invest and what assets you’ll buy. Never spend the money you’re not willing to lose.

The details we explored mostly apply in the United States. If you live in another country, check information related to that location. You might have to deal with other guidelines.