EP 013: Why I Don’t Trade Penny Stocks

The Famous Penny Stock…

For most new and non savvy investors, penny stocks at first seem like a great idea and way to get started in the stock market. But there are a few things to consider. Let me tell you why I do not trade penny stocks, why I do not recommend trading penny stocks, and the solution.

What is a penny stock?

A penny stock is anything that is trading under five dollars. Usually, once a stock hits under five dollars, they get kicked off the major exchanges and get traded on the “Pink Sheets”, which means that they are not good enough to be traded with the rest of the companies of the world. Quite frankly, this is a good indication that this company is about to go out of business.

When you first get started in trading, many think that with your limited budget, trading penny stocks is the answer.

What is a penny stock really worth?

What do you think? It is actually worth a penny, up to $4.99. Anything less than 5 bucks. This means: you can get a doctored up froofy drink at Starbucks in equivalency for trading this stock! You are now investing in a company whose value has rendered equal to a low-fat, 103 degrees latte. Their management, products, marketing, customer base, and everything about this company is saying that it is worth 5 bucks or below, even a penny.  You cannot buy the best with a cent. You are actually buying the worst culture, management, product, inventory system, maybe they have been sued… etc. You are truly buying a penny worth of anything associated with that company.

How you are gambling with penny stocks

Here is an example: let’s say you find a healthcare company that is trying to find a cure for cancer. Right now it is trading at $0.50. You are gambling because, you are saying, “I just know this company will go back up to $3.00, $10.00, or even $100.00”. What you are saying that this company, which is operating less than your latte, actually not even a whole cup of just coffee at this point, is somehow magically in their under-funded lab going to beat out a billion-dollar company with the best of everything, and come up with a cure for cancer. That is gambling. It is highly unlikely that your scenario is going to happen.

To clarify

That does not mean that there isn’t any money to be made in a penny stock. I am not saying, “No one ever makes money in penny stocks”. You can make money doing almost anything in the stock market! There are a ton of possibilities. I am saying that penny stocks are not my thing, because there is a better solution for them.

Penny stocks problems:

1. “Pump and Dump” – penny stocks usually have promoters, using a variety of methods, including emails and snail-mail. They promise that as soon as XYZ happens, this stock is going to the moon. It gets people thinking: “They might be wrong, but what if they’re right?!” That is when we venture outside of common sense. It is highly improbable, and we know it, but the temptation train takes us right out of of Logic Land and drops us off into What If Land. But when it comes to investing, it is more of a plan made in Logic Land. Not a whim and a “see what happens” attitude.  When people see this advertised and start buying, it may go up to 2 or 3 bucks and the people who owned it at 2 or 3 cents start to dump their shares. Then the price begins to fall, and they stop promoting the stock or it goes out of business.
2. “Scalping” – when someone is telling you to do something and they are doing the opposite. For example, if I am telling you to buy a stock and tomorrow I go and unload the stock. It is illegal, yet people do it anyway.
3. “Unverifiable Information” – when a stock gets kicked under 5 bucks, banks, analysts, news writers, etc start to loose interest.  There is nothing left to talk about, they can’t write about it everyday. This means they have unverifiable information, there aren’t many sources or places to find out the straight facts about the penny stock companies. Analysts aren’t analyzing. When promoting emails come in, you can’t check to ensure that what it says is correct.

What is the solution and why?

Most people want to get started with whatever they have, with a little amount of money, and to do something meaningful with it to see a return and make it work long-term. The solution: trading options.

Why? Because trading options allows you to control quality stocks, not own. Many people start trading penny stocks because they want to own the stock, and have little to start with. However, with trading options, you can control big companies, including Google, Netflix, Amazon, etc for the same price. For example, if Amazon is trading at $700 and you think it will go to $730, you can control the $30 increase process for a certain period of time.

If you can trade a big company stock, it is the opposite of a penny stock because they have verifiable sales. You can research them and check out the analytics. They are also trading on the major exchanges, including the NYSE and the NASDAQ, instead of the Pink Sheets. This means it is more regulated and it’s a broader exchange, where respected brokers and 401Ks are going to go. You have more access to highly liquidity stocks, with more volume, people, and brokers. Some brokers do not even do business with the Pink Sheets.

Penny stocks can be manipulated or it might be close to going out of business, so there is not a lot that you can deduct from reading the stock charts. You cannot detect a pattern in movement of the stock and can’t determine where the stock is going to go. But when you trade the Apples and the Googles of the world, they have patterns that are distinct and show you support and resistance. You can put money to work and have a certain amount of confidence of what it is going to do. With options, you can control higher value stocks during the range you spotted on the chart.

New free options trading webinar & Group Coaching community

There is a webinar I hold that is all about the option trading power. If you do not understand how to trade options, you want to be on it. Options is so powerful in making money, even when the stocks are going down. I will be going over the four problems stock traders face and how to avoid the traps, case studies, option strategies that increase profit by 200%, and more. This webinar will be running on-going to help you learn how to grow your account. Be sure to register by clicking here at a time convenient for you.

We all succeed better if we have a group of likeminded people surrounding us and supporting us – and it is the same with trading. If you would like to learn how to trade options successfully, being a part of a group program will expedite your success. In the Power Trades University Group Coaching program, we weekly meet in a live webinar for 2 hours to hone in our option trading skills and support each other with our option trades throughout the week. You can check it out here: POWERTRADESUNIVERISTY.COM 

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