Why you should avoid penny stocks?
Today we are going to discuss on penny stocks.
Yes, stocks which are trading at “penny”.
How many are interested in investing in, YESBANK, VODAFONE etc?
I assume that if you are new than you have definitely have given thought of investing in these penny stocks and become millionaire when these stocks regain their all time high.
Before I explain why you should avoid these, I want you to answer below questions first:
Let’s take Vodafone as example to simplify further explanation.
Stocks has already lost 90% value, why do you think it will go up after you invest?
What’s the reason that the stock has such a downfall?
What secret do you know that other big investors and mutual fund don’t know?
Have you ever seen a main stream stocks losing more than 90% and regaining it again?
If you can answer above question and answer them honestly then you will realize that Investing in this kind of stocks is just “GAMBLING”.
And no.1 rule of trading and investing is never gamble.
Reasons, why you should avoid penny stocks?
1. Its total junk:
It’s simple, big player have exited these stocks and thus they are trading at such low valuation. Every investor likes good companies. They will never miss opportunity when stock declines to reinvest. If stock is falling more than 90% than its clear big investors are getting out rather than building the position.
2. Very Low probability of success:
How many stocks have you seen regaining all time high after dropping 90%?
I have never seen that. If you don’t find such stocks than why do you think that your penny stocks will change this stat?
3. High Manipulative nature:
As these stocks are very cheap, it is easy to manipulate. For example, a share with a market price of Re 1 can go to Rs 3 in no time, if even a small investment is done. A rise of 200 per cent would attract other investors to put their money with the intention of making a quick buck. However, these are the traps to manipulate and wash out the money invested by others. As a manipulator would sell at a hovering high price leaving all others at huge losses.
Above reason are more than enough if you are trader, not a gambler.
Look at below chart of some penny stocks which will show you the reality of penny stocks.
LIFE TIME HIGH :844
CURRENT MARKET PRICE: 1.5
WEALTH DESTRUCTION: 99.7%
LIFE TIME HIGH :1484
CURRENT MARKET PRICE: 1.4
WEALTH DESTRUCTION: 99.8%
LIFE TIME HIGH :460
CURRENT MARKET PRICE: 3.0
WEALTH DESTRUCTION: 99.3%
LIFE TIME HIGH :339
CURRENT MARKET PRICE: 4.0
WEALTH DESTRUCTION: 98.8%
LIFE TIME HIGH :122
CURRENT MARKET PRICE: 8.7
WEALTH DESTRUCTION: 92.8%
All above companies were STARs and investor friendly when they are trading at all time high. Rest is history.
And thus, these are the main reason I would stay away from penny stocks as an investor.
However, as a gambler, they are great! You have the potential to win big, and lose big, and that’s what most gamblers look for.
Here, you have to make hard choice, are you a “trader” or “gambler” ?
Fact, initially i wanted to name this blog “HOW TO BECOME BEGGAR?”