This isn’t going to be easy for me but I have to admit something to the readers of this blog that I am not proud of. I got caught up in something with a colleague from work and it has to stop the moment I hit publish on this post. Recently, I have been using hard earned cash to gamble in penny stocks that aren’t listed on these major markets. These are not investments they are a pure gamble and I am pissed at myself for getting involved.
A lot of people do it, and I am not judging, but I do know I do not like the feeling of buying into a company whose financials are questionable. If I am going to gamble (and anyone who follows me on twitter knows I love me some casino time) I am going to do it at the blackjack table.
I should make it clear I am only currently down a few hundred between realized and unrealized gains/loses. This wasn’t something I was “doing” but rather, something I just got caught up in. My true passion is for equities that are undervalued and have been increasing their dividend payment for 20+ years. It isn’t the money that I am made about, but rather folding to the pressure of actually buying one of these terrible companies.
What is a Penny Stock? Where are a Majority Traded?
When most people think of stocks they think of the companies that I talk about during my monthly stock screening for undervalued dividend champions, however, there is a world beyond the Cokes, McDonalds, Wal-Marts. The SEC defines a penny stock as,
a security issued by a very small company that trades at less than $5 per share. Penny stocks generally are quoted over-the-counter, such as on the OTC Bulletin Board (which is a facility of FINRA) or OTC Link LLC (which is owned by OTC Markets Group, Inc., formerly known as Pink OTC Markets Inc.); penny stocks may, however, also trade on securities exchanges, including foreign securities exchanges. In addition, the definition of penny stock can include the securities of certain private companies with no active trading market.
and they warn,
Penny stocks may trade infrequently, which means that it may be difficult to sell penny stock shares once you own them. Moreover, because it may be difficult to find quotations for certain penny stocks, they may be difficult, or even impossible, to accurately price. For these, and other reasons, penny stocks are generally considered speculative investments. Consequently, investors in penny stocks should be prepared for the possibility that they may lose their whole investment (or an amount in excess of their investment if they purchased penny stocks on margin).
There are some penny stocks like Sirius (currently trading under $5 a share) where you can trust their financials (however, whether you disagree with the value of the business is a post for another day), but then there are some shady shady companies. One that I bought shares of literally traded for .001. Yes, one-tenth of a cent! But don’t worry their earnings will be fantastic if they ever release them. Companies worth less than a buck for an extended period time are usually sent to the minor leagues of markets. Investopedia provides a pretty good explanation of the system,
A security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, etc. The phrase “over-the-counter” can be used to refer to stocks that trade via a dealer network as opposed to on a centralized exchange. It also refers to debt securities and other financial instruments such as derivatives, which are traded through a dealer network.
In general, the reason for which a stock is traded over-the-counter is usually because the company is small, making it unable to meet exchange listing requirements. Also known as “unlisted stock”, these securities are traded by broker-dealers who negotiate directly with one another over computer networks and by phone.
Be very wary of some OTC stocks, however; the OTCBB stocks are either penny stocks or are offered by companies with bad credit records
How Did I get Suckered In?
As mentioned earlier, I was watching a colleague making pretty good money with very little effort in a short amount of time. So I started piggy backing his trades which were mostly profitable. I took a left turn on a few and like I said I am a down a few hundred (although I still have the equities).
Why am I NOT Trading Penny Stocks Ever Again?
If I want to gamble I’ll go to a casino! I should reiterate that the amount that went into this venture was a fraction of what I put into my responsible and boring investment. Notwithstanding, I was buying and selling intra-day with companies that had little to no history, and worse, I didn’t even open up a financial statement.
At this point, I am going to hold my remaining shares and wait for a pop or two and shut the door on OTC Penny Stocks.
Have you ever Traded Penny Stocks? How did you do?
I wish the SEC would use a market cap. definition for penny stock. Sirius XM is a great example as the company is actually worth more than Twitter that trades at $30+.
I hope you at least got on the board of directors of that company with a stock trading at .001. If not, will a crisp Jackson get you there ;-)?
ha no, but I made the exact same joke when approached with the stock LOL!
The SEC does make distinctions between Micro, Small, Medium and Large Caps…but I think Penny stocks have such a connotation they wouldn’t be able to change the definition this late in the game
Been there, done that…as they say. I agree 100% that it’s simply gambling with your money. I have to admit that I once dabbled in penny stocks, when I was single, young and foolish. haha
Although our family’s stocks portfolio is still not where I would like it to be, I can at say that I now buy stocks using a set criteria. Penny stocks will never fit this criteria. We now prefer the dividend champions like the Coke, McDonalds, and Walmart. In fact, I just picked up more shares of Target (TGT) just yesterday.
I think you’ll like this category:
Well at least you’re cutting yourself off before you get in too deep and lose any serious money. Think of it as a diversion that got you slightly off course but now you’re back on top of your game.
Yeah, didn’t lose much money just annoying!
Heh, nice, but don’t worry, I think we all sometimes do something dumb as the temptation is very strong. I think you need to find some more adventurous way of investing to satisfy your itching coming during boring dividend investing 🙂
I tried pennies too and lost money as it wasn’t for me. But I found options and they sometimes give me adrenalin, quick profit (but may also give you a big loss) and combine it with dividend investing. The goal is to perfectly understand what your risk is, where it is coming from and how you can avoid it, then it will be perfectly okay to trade that instrument be it pennies or options. But to learn that it takes time and you need to do it in order to learn it.
I understand your position and don’t be mad at you. You tried, you know it is not for you, so move on. It is good to have a few bucks aside as play money for this purpose.
“Heh, nice, but don’t worry, I think we all sometimes do something dumb as the temptation is very strong”
– The upside is so damn tempting lol
I have only done options in two cases:
– Covered calls
– Puts to bet against a company (once – LULU)
I saw you do it for income I’d love to understand the technique more.
There is a reason that these stocks are penny stocks, and typically it has to do with poor management, lousy products, or bad credit. All things to stay away from. Can you make money with penny stocks? Sure, but over the long term you will probably lose money. Is it investing? No. As you and others pointed out, it is gambling.
All great points Bryce. I guess I just needed to learn my lesson lol
I am glad you wrote this post. It can be so tempting for those with little money to try and get their foothold in stocks with penny shares and those are the very people who haven’t really got the money spare to play with.
Glad you have taken stock(sorry, bad joke) of the situation before it got out of hand.
Before I started investing into DG stocks I would mostly make speculative purchases. I bought into a couple of penny stocks. One was making a new software that catered to waste management systems. The other company was basically coming up with a cure for the flu lol. Neither of those companies are still around and I lost a few thousand bucks. I’ve since learned my lesson. Have you seen Wolf of Wall Street? Those investors didn’t end up doing so well either, just the broker.