Investors beware ? penny stock hucksters are preying on investors again. Jonathan Hoenig, managing member of Capitalistpig Hedge Fund warns “Penny Stocks Aren’t Worth a Dime” (SmartMoney.com, Feb. 6, 2012). Most of the stocks that make the yearly new-low list are penny stocks (less than $5 a share), and many institutional investors will not buy stocks under $5.00, according to Mr. Hoenig, for the following reason: “There are few lower probability trades than penny stocks, especially of microcap companies trading at a multi-month lows. They are the classic sucker’s wager. Scratching off lotto tickets might be a better bet. It’s a smart discipline: with thousands of different risks to assume, why take on the worst possible option?”
Sellers of penny stocks play on the irrational desire to buy a lot of shares of anything hoping for a big pop. Even accepting that highly improbable gamble, it is a bad idea because the illiquidity of such stocks can add upwards of 5 percent per trade to the cost. Real gains, Hoenig says, come from trends that persist over time, not a one-day pop.
Many experienced investors avoid penny stocks entirely. Investors should look at penny stock sellers as scam artists. If you get a call from one, don’t be polite; just hang up. That’s a good rule of thumb for any cold call. Put an end to it abruptly. It will save you money.
Page Perry is an Atlanta-based law firm with over 170 years of collective experience maintaining integrity in the investment markets and protecting investor rights.