In Wall Street Kitchen, I talk a lot about buying quality companies – companies like Canadian National Railway, Apple, and IBM.
What about the little guys, Victor? Never do I suggest start-ups and penny stock companies that make it onto the exchange for logical reasons listed below. Buying penny stocks is like a Hail Mary pass – you can strike it big, but even in professional sports they are a last ditch choice. And for making money in stocks, there’s ALWAYS a better choice. Here we countdown the top 4 reasons why you shouldn’t touch penny stocks…even with a ten-foot pole:
#4) No standards
You see, penny stocks, sometimes called pink-slips, aren’t required to follow the rules and regulations set up by the SEC. Meaning they can get away with a lot of stuff. It’s like playing the game of basketball where the guys on the other team can run with the ball without dribbling.
Things like earnings reports, number of employees, even their identities can be questionable. Even if they do disclose the information, how convincing of a story do they have to tell for you to trust them with your cash?
#3) Lack of History
A company without proven history is a major deal breaker for me. To me, that’s any company that hasn’t been around for 10 years or more. It’s like hiring a delivery truck driver and when you ask the man for his driving record, and the guy says, ‘I’ve never gotten into any car accidents, you’re just gonna have to trust me’. How likely will you hire this man to deliver your precious goods?
#2) Lack of Liquidity
Trading activity is generally very low with penny stocks and if you wanna sell, the only people who may buy are ones who will low-ball you at the knee caps. It’s like buying a special edition pair of shoes or a model plane; if no one is looking to buy them you might be lucky to get back what you paid, after who knows how long, when all is said and done. Nothing’s worse than putting your money into an investment only to find out that you cannot get back out – especially in a situation where you really need the money.
#1) Lack of info disclosed to the public
This is my biggest reason. It’s like a stranger asking you to fork out $1000 in exchange for the mystery contents contained inside a cardboard box he’s holding without telling you anything else. You simply need more information to make an informed decision. If this situation were in the stock market, you’d be surprised: a lot people will throw money at this guy hoping whatever’s in that box yields more than what they’re throwing at him.
Still looking for that Hail Mary? This ain’t the Super Bowl and you’re not Tom Brady.