Lux Investing
Penny stock investing...is this a good idea?
First, a quick background. I'm a college student and my knowledge of investing in stocks is limited to the few economics and finance courses I have taken. Anyway, I have about $7,000 just sitting in a savings account which I have been accumulating since I was a teenager (I practically save all my money). I have no need for that much liquidity (my parents pay my tuition and for my car and tell me not to get a job while in college because it'll mess with my academic performance) and wanted to see if the following is a feasible idea, or if I'm just a moron. I follow a lot of different stocks, some obscure ones. But anyway what if I were to, for example on a whim, buy about 100,000 shares of green gold ray energies stock (GRYE) for $0.05 a share for $5,000 total. Hold onto it for a year and some change to avoid the short term capital gains tax, and sell all my shares at some point in the future when the stock price is significantly higher, say $0.50 or more. I know the point of investing is to diversify, "stay in it for the long run", etc... But would this be a decent idea? Keep in mind, I have no need for all $7,000 of my money at this point in time, and probably won't until I graduate in about 2 years. I suppose I could start saving for retirement now, or do many more intelligent things with my money...but I just want to know if this would work!
Public Comments
- I would not do that. Let's pretend that the stock has a 50/50 chance of going up or going down on a given day. If it goes up by one cent, you will make 100 000 cents or 1000 dollars. If it goes down, you will lose 1000 dollars. That is 20% of your total investment, which makes this a hypervolitile stock. You will either win big or lose big if the stock makes the smallest possible move. Lets look at another problem. Stocks that sell for 5 cents a share are priced that low because there is something drastically wrong with them. Expecting a 5 cent stock to increase in value to 50 cents is extremely unrealistic. A third problem is that the stock is also quite likely to tank and be worth 0.00 dollars, or do a reverse split meaning that you will have 1000 shares worth 10 cents each, leaving you with 100 dollars on your 5000 dollar investment. You would be better off buying a blue chip company that you are sure will not tank in the coming months, and that can produce dividends. If you want a small company with growth potential, it is absolutely the wrong time to buy.
- Short Answer: No way, you'll lose your shirt. It's a completely horrible idea. The VAST majority of these penny stocks will never go anywhere. They'll move up and down huge percentages, but in the end most will fail. Don't forget your businesses classes, most business fail. If penny stocks were really a gold mine, all the big investors will be in them. Also, the volumes are so low, you'll always have a hard time getting a fair price on either the buy or sale side. Think you can trade the ups and downs quickly enough? Doubt it. There are people whose computers autotrade far faster than you can ever respond. Also, look at the best stock investors and money managers. They won't touch penny stocks with a ten foot pole. If you are still interested in stock picking, you'll learn far more and do better in the long run with trading regular stocks. If you are interested in cheap stocks, now is the perfect time. Stocks like Ford, GM, Citigroup, Sun Microsystems, and many others trade well below $10. But lets look at your example GRYE. Average daily volume is about 25K. If you put in a buy order of 100,000 shares, it'll drive the price sky high to fill the order. Then you'll be holding 100K shares and you'd need someone to come in and buy even more shares to even budge the price. If you really feel like this is the way to go, buy $500 bucks worth. It'll be a much cheaper less then buying 5K worth. If you don't believe me, I'll see if I can buy some shares tomorrow and push the stock up, forcing you to buy at a higher price, then once you buy, I'll sell them. Then you'd have to find someone to come in at an even higher price then you purchased them at.
- I can tell from what you're saying that you will be good at stock investing in the future. You have good insight. So with respect.... this is a terrible idea. Typical of a new investor, but none the less a very bad idea. This typical new investor goes after the "home run" investment in the worst areana in the stock market.... penny stocks (any stock trading for less than $5.00). I use "technical analysis" to trade stocks.... and I must tell you this chart looks terrible (on the weekly and daily time frame). What's worse.... there is little volume in this stock. Your purchase could easily increase the price of the shares 20-50% or more (unless you use a limit order... which I believe is mandatory for all orders). You could also find next year that getting out could cost you 20-50% just because your volume would be 30% or more of the daily "action". There are a ton of other reasons...... but my bottom line is..... penney stocks should only be traded by people with 5 or more years of very successful investing/trading experiance...... Because.... you have no idea how to avoid the worst scenarios. You don't even know what they are. Now is a great time to learn about trading. Not a great time to just throw your money out on a gamble. Good luck!
