Penny Stocks [101] | Phil Town

TL;DR

Penny stocks are cheap stocks that trade for less than $5 a share and offer the potential for high returns, but are risky due to the lack of information, higher likelihood of bankruptcy, and low liquidity.

Transcript

hi guys I'm Phil town from rule 1 investing today I want to talk to you about penny stocks if you've been researching investing chances are you've heard the term penny stocks there's a lot of differing viewpoints about these kinds of controversial stocks for every person warning you that they are the quickest way to lose everything you own there's ... Read More

Key Insights

• ™️ Penny stocks are cheap stocks that trade for less than $5 a share, often sold on the Pink Sheets.
• 🤪 Small and new companies are more likely to be penny stocks and have a higher risk of going bankrupt.
• 💄 Dilution is a risk associated with penny stocks, where companies divide their valuation over millions of shares, potentially making the stock worthless.
• 💄 Penny stocks have less liquidity, making it difficult to sell stocks at desired prices.
• 💁 Investors must do their own research when investing in penny stocks as there is less information available from analysts.
• 📏 Applying rule one investing principles can help mitigate the risks of investing in penny stocks.

Questions & Answers

Q: Why are penny stocks considered risky?

Penny stocks are considered risky because they are often sold by small, new companies with limited resources and a higher likelihood of bankruptcy. There is also less information available from analysts, so investors must do their own research.

Q: What is dilution and why is it a risk?

Dilution occurs when companies divide their valuation over millions of shares, decreasing the value of individual shares. This can make the stock worthless and is often done by companies to profit off of unsuspecting investors.

Q: How can investors mitigate the risks of investing in penny stocks?

Investors can mitigate the risks of investing in penny stocks by applying the four M's of rule one investing - ensuring the company is ethical, understanding the industry, finding a company with a competitive advantage, and buying the stock at a discounted price.

Q: Is it recommended for beginners to start with penny stocks?

It is not recommended for beginners to start with penny stocks due to the higher risks involved. Beginners should focus on learning the basics of investing and choosing more established and stable companies.

Summary & Key Takeaways

• Penny stocks are stocks that trade for less than $5 a share, often sold on the Pink Sheets, due to their small size, newness, and lack of resources.

• Investing in penny stocks can be risky as small companies are more likely to go bankrupt and the lack of liquidity makes it difficult to sell stocks at a desired price.

• Dilution is another risk associated with penny stocks, where companies divide their valuation over millions of shares, potentially making the stock worthless.