I just had a call with a potential member looking to “win big” (yes they said that) with Penny Stocks.
This article is long overdue.
We’ve got an astounding country full of amazing companies, doing incredible things, earning money and increasing their value.
Every. Single. Day.
Every single day we get between 5 and 15 people tell us how they’ve found this unbelievable company trading for 3 cents. It is massively undervalued and is going to change the world, and double, triple and quadruple its value and their owners finances along with it.
Unbelievable is the word.
Mostly because “a friend told them”, “I found the CEO on a forum and told me about it and said to keep it to myself”, or “it was inside a Christmas cracker”…
The Penny Punt
That last one was an exaggeration, or was it?
These are otherwise known as lottery tickets, a punt or universally known as a Penny Stock, or more truthfully as a Penny Punt.
Jordon Belfort, a pillar of virtue in the investing world, had the most straight forward reaction to this in the Wolf of Wall Street when he said…
Jordan Belfort: Six cents a share? Oh, come on. Who buys this crap?
Dwayne: Well, I mean, honestly mostly schmucks. Postmen, there’s always postmen. Uh, plumbers. Um, they see our ads in the back of Hustler and Popular Mechanics, and our ads actually say they can get rich quick.
Back to the phone call.
A new member wanted a call back and mentioned in a note that they were going to focus on Penny Stocks as a way to learn how to trade.
As he had a smaller amount to trade with, he’d decided to pick the most volatile and dangerous area of trading to start learning from. An area where even the most expert of experts have real problems finding profit.
Why you take risks in share trading
But psychologically, when you look at how we work as humans and the nature of Penny Stocks, you can understand why people are drawn to it.
Think about it, everything we are told is good sets us up to buy these stocks! We KNOW, LOVE and are excited by the things below:
- Cheap is good
- Small investment for a HUGE potential return
- I heard it off a man/woman, who knows the CEO
- I have to get in now
Let’s look at the reality of this…
Cheap is BAD (mostly)
Cheap means the company has no value, it’s likely to fail, bad product/service, falling or zero revenue and has no trust in the market that they will succeed. Without the background knowledge of the fundamentals, all you see is cheap, usually coupled with “it’s hugely under-valued”.
IF it is undervalued, and forms what we would call a Contrarian play then its an opportunity then this is a great potential. But less than 5% ever do the work to uncover this.
Small Investment = HUGE Returns
If you constantly focus on big returns you’d generally be trading volatile stocks (big ups, big downs) with all your capital in one stock you want to get the most upside. Big risk, big return right?
The majority of people in this situation will not know when this risky trade is at its peak, as they are focused on more. You’ve taken a big risk, so you deserve your big reward right? Those in the know, or who know what they are doing will start to sell pushing the price down.
Meanwhile you are waiting for it to go up again and are not interested in taking “just” 10/20/30%. That was actually your chance!
This approach is compounded by the perception that trades like this are once a year or a lifetime. Of course this depends on how it has been sold to you, usually by the friend that means well and wants to take you with them on the “ride of a lifetime”.
With 2100+ companies on the ASX, less than 4000 on the NYSE and 15,000 traded over the counter (not on a major exchange) there’s no shortage of stocks to trade.
If you act on what you are told and not on what you know, you will fall for this every time. Especially if you believe the only way you can get ahead in trading is with BIG upside.
You will take riskier and riskier trades with more and more of your portfolio until you lose everything. Finally your share trading exploits become a cautionary tale that comes out at pubs/dinner parties as a warning to anyone about getting into share trading.
I heard it from someone who knows the CEO
Oooooh forbidden knowledge that NO ONE ELSE knows, sounds fantastical!
The reality check here is that the train has long since departed the station. Unless you are actually in the circle of influencers, the power brokers, the network with net worth then its incredibly unlikely that you’ve heard anything exclusive, profitable or even true.
Please don’t fall for it, especially if that news source is from your local tavern or especially from a forum where companies sinking go to start rumours to grab some cash before properly sinking and taking you with them.
If you’ve heard it on the grapevine, then you are most likely the grape closest to the ground that’s going to get eaten by a rat.
Act Now or Miss Out
If you are someone who gets emotional or excited quickly be aware you are the perfect person to get caught buying low value shares and losing money.
Getting carried away, jumping in on trades without research is a great way for lower-value businesses to sell you their cheap stock before tanking.
Con artists have been using this as a means to seperate people from their money for 1000’s of years. Self-awareness is one of the most powerful tools in your arsenal, right next to your own research.
So what should you do?
Good question. If you cannot control yourself don’t trade shares full stop. If you do, do not trade Penny Stocks looking for “quick wins”.
This all comes down to common sense, hard work and valuing your money, which is why 90% of people will never follow this advice.
If you are happy to at least do some work or invest in companies doing the majority of the research for you but also invest in your own knowledge to cut down the time it takes to become proficient.
If you are not a natural researcher, reader, numbers person or have any interest in being so – you will not be this overnight or ever. If you’re not passionate about exercise and get a gym membership because you know you should, how many times do you go? Never, maybe once to prove you can!
The secret to your share trading future…
You do not have to research 5-10 hours a day to make money in the market.
We have members doing this on 15-30 minutes a day, others spend 5-8 hours a day but it’s their choice to spend that much time doing it.
If they can, you can. You just have to choose to.
Leave your gambling at the track, focus on your education to make smart investment choices and value your money enough to not trust “tips”, especially those from friends.