Every so often stock analysts offer a list of penny stocks. Our question is do penny stocks work in general and do penny stocks work for your stock portfolio? Let’s start with an article from Money Morning, How to Find Good Penny Stocks to Buy Today.
The key to how to find good penny stocks to buy today is knowing what you are buying and if it fits your needs.
The first thing you want to do as a penny stock investor is figure out how much money you have to work with. Basically, don’t invest anything you can’t afford to lose.
We typically recommend no more than about 2% of your portfolio in one penny stock.
There are some great buys in penny stocks and there are penny stocks where scammers pump and dump. The first step is to avoid the scammers or over-hyped stocks of the day.
Problems with Penny Stocks
In order to invest wisely you need accurate and timely information on which to make decisions. You should be trading stocks in a liquid market that lets you enter and exit positions when you want. Investopedia offers their take on penny stocks and lists four factors that should give investors concern.
- Lack of Information Available to the Public
- No Minimum Standards
- Lack of History
- Poor Liquidity
True penny stocks do not trade on major stock exchanges. They trade via pink sheet on over-the-counter markets. These stocks are not required to file info with the Securities and Exchange Commission so you access to accurate and timely information is nil. And new penny stocks have no history. The stock may have a great story but the company and its management have no performance history for you to consider. And because these stocks trade thinly you may have trouble getting in and out of the stock at the prices you want.
Past Performance as a Predictor
We looked at an article in The Street from 2011. They described the 10 Best-Performing Stocks under $5 for that year. Check out the article for all picks. We only list the ones that are still in business and trading for more today than in 2011; info is from Google Finance.
#10, Radio One, ROIAK
This stock’s top price in 2011 was $2 a share. It peaked above $5 at the start of 2014 and trades at $2.63 a share today. It does not pay a dividend.
#7 Authentidate Holding, ADAT
The stock was trading at about $1 a share in 2011 and the highest it was until just recently was $1.82 a share in late 2014. Interestingly the stock jumped from $0.50 a share to $5.38 a share in the first days of January of 2016 and has been falling ever since, now trading at $2.60 a share.
#6 USA Technologies, USAT
This one has a bit of growth. Having traded around $2 in 2011 the stock dipped to $1 a share in early 2012 and has grown to the $4.00 to $4.50 a share range this year.
So, do penny stocks work? One might say that for the vast majority, once a penny stock always a penny stock. Many penny stocks go out of business. The only semi-impressive stock in this list is #6. You can see how penny stocks get hyped when they have a good year. People buy at that point only to see the company go out or business, steadily lose money, or at best grow a little. The only stock in this list that did as well as the S&P 500 in the last five years was USAT.