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Penny Stocks 2012
Psst…Psst…Hey you over there…come closer, I have a hot stock tip for you! Has this ever happened to you? How many times have you heard a story of someone losing a fortune by placing a bet on a hot stock tip that went south. How about the stories of the great stock tip that shot up to the moon. Well if the truth be told, penny stocks have done exactly both. Therefore it stands to reason that Penny Stocks 2012 will probably do the same. Large sums of money will be earned as well as lost. Just for the record, let’s define what we are talking about.
Penny stocks or "Pennies" as they are affectionately referred to, are the securities of small companies that trade for less than one dollar per share. You may have heard that this number is less than five dollars per share. This is due to the fact that the big players such as the brokerage houses, the mutual funds, the pension funds and the institutional funds all shy away from securities trading below five dollars. This is because they feel that they are much too risky to get involved with. Two particular traits of penny stocks that the big players hate are illiquidity and a large bid-ask spread. If a particular stock does not have enough people buying and selling shares, it is considered illiquid. As such you might not be able to sell out of a position when you would like to. Additionally, this illiquidity leads to a large bid-ask spread. Since a trader buys at the ask price and sells at the bid price, having a large spread does you no good. It would appear that penny stocks 2012 would hold the same promises and the same disappointments as in years gone by.
So what is a potential penny stock trader supposed to do? The answer is multifaceted but certainly has a basis in common sense. As with all investing good common sense dictates that you should not invest too much in any one sector or discipline. For instance, a very general rule of thumb is that a person should subtract their age from 100. The resulting number is what you should invest in stocks with the remainder to be invested in bonds. So let’s say that you are 40 years old. You would invest 60% of your portfolio in stocks and 40% in bonds. This is not totally black and white as any prudent investor should keep a very small portion, say 5% or 10% left in cash so as to be able to take advantage of a market opportunity that presented itself. Now assuming that you followed this principle, your 60% invested in stocks could be spread around many different opportunities such as blue chip stocks, technology stocks, mutual funds, penny stocks etc. The most that any sane person would invest in any one area would be 10%. Knowing this, 10% of your 60% invested in stocks is 6%. Now you have one of your multifaceted answers to penny stock investing and that is no more than 6% of your total portfolio.
The next piece of the investing puzzle that you need to make sense of when deciding upon what penny stocks to pick is known as due diligence. In other words you need to do some homework on the company that you are contemplating for purchase. A little research will serve you well and hopefully point you in the right direction. The last thing you want to do is buy a penny stock based on a hot tip. Far too many penny stocks have been the subject of “pump and dump” schemes. If you are not familiar with this term, rent a copy of the 2000 Hollywood film “Boiler Room” . Basically an organization will buy up a tremendous amount of a worthless stock and begin to send out information that this is greatest stock to own since the dawn of time. The resulting buying frenzy that follows will “pump” up the share price. Then at some point, the firm will start unloading their shares fast. This is the “dump” phase and results in the firm getting out of the market with ill-gotten profits while all the other unsuspecting investors are left holding worthless stock as the share price tumbles due to all the selling activity. Certainly penny stocks 2012 will have their own members of future pump and dump schemes so beware.
The final piece of investing advice is the following: Now that you know that these securities could become worthless, make sure that no other aspect of your life is dependant upon this money should the stocks go to zero. It would be in your best interest to subscribe to a penny stock newsletter. You need a constant source of new information and a subscription based service tends to be the most unbiased. They are happy to have you as a member as their main source of income is from advertisers. As such they do not get involved in persuading you one way or another. One word of caution however, there are free services as well as paid memberships. As with all things in life, you get what you pay for!