Are Penny Stocks Dangerous?

If you’ve been in the stock market space for any length of time, you’ve probably heard this sentence at least once or twice:

Penny stocks are dangerous.

Is this true?

Well, let me give you a little analogy to help clear the air.

I used to ride skateboards all the time. I was pretty good at it, enough to get sponsored by a local skate shop (which later closed down, LOL). One thing that an experienced skateboarder can immediately recognize is whether or not someone else knows what they’re doing when they step on a skateboard.

It shows instantly when they don’t.

Now if you were to give the average Joe a skateboard and tell him to drop in on a 12-foot vertical ramp, you might need to have an ambulance waiting at the scene. But if you asked Tony Hawk to do the same thing, he could literally do it with his eyes closed.

What makes the difference?

One person knows exactly what he’s doing, and the other one doesn’t.

Now I could sit here and say “Skateboards are dangerous,” but that’s not entirely true. They’re really only dangerous to someone who doesn’t know what they’re doing, but if you have built up your skill set over years of practice, the risk factor drops dramatically.

Warren Buffet and risk
The Oracle of Omaha dropping that knowledge nugget (via @TradingProverbs)

Any time you enter the arena of penny stock trading (or any type of securities investing, for that matter), you may not even realize it but there’s a large bulls eye painted on your back. Unscrupulous “investment advisory services” as well as dime-a-dozen stock trading newsletters will seem to come out of the woodwork to push this or that “hot stock”, normally in hopes of you subscribing to their service or forking over some type of cash to supposedly get in on the “next Google” or whatever. All of these things can be misleading, confusing, and downright overwhelming to a beginning investor or stock trader, and many people that enter that arena of penny stock trading leave only months later battered, whipsawed, and with much lighter wallets. This doesn’t have to be you!

The main thing you have to understand about penny stock trading is that there are several factors surrounding the actual act of trading that must be dealt with. One of the biggest favors you could ever do to yourself is to cut off all the investment advisory newsletters, cut off the “talking heads” on the different financial news channels and websites, and really hone in on studying price charts of the penny stocks that you are interested in. This will give you plenty of first-hand education on what really makes these markets tick.

The biggest question in most people’s minds when they are considering trading penny stocks is “How risky is it?” I would like to approach that question from a different perspective. If you go into an investment blindly, having done no research whatsoever, not having learned the vocabulary and terminology of the investment world, and simply going off the opinions of a broker or some other third party, I can almost guarantee that it will be a painful experience, no matter how much the brokers/advisors try to sell you a “pipe dream” to the contrary. But if you have done your homework, researched your market, and are familiar with the topography of the investment landscape that you’re covering (forgive the fancy phrasing but I couldn’t resist), you can enter the penny stock trading arena with confidence, and you can then take calculated risks that have a much greater potential of actually paying off for you. So back to the question of whether or not penny stock trading is “risky”, I would answer this way: “Is your approach risky?”

Are Penny Stocks Dangerous?
Avoid a risky approach at all costs.

This is the truth of the investing world; not just penny stocks, but investments overall. Many times people approach investing with a gambler’s mentality, or a cavalier attitude, looking for an emotional high, but not actually interested in earning solid profits, even when sometimes earning profits can be boring. Many people prefer excitement over sound trading principles; this is one of the most common traps that newcomers to the penny stock markets fall into, because penny stocks are among the more “hyped” investments that are out there. But if there’s one thing I’ve learned during my 16-year tenure as a penny stock trader, it is that emotional excitement and making profits are not always equivalent. In order to properly trade penny stocks, you have to develop a trading plan that will define the guidelines and standards that you plan to operate by, and that you will not deviate from, even if the trade doesn’t go your way. When you finally get to the place of emotional stability in your trading, it will lead to profitability.

In conclusion, the world of penny stock trading has enough hype as-is; I encourage you to be the kind of trader that won’t bend to the temptations of trading for emotional thrills, but rather trade in line with sound investment principles. Believe me, your trading account will thank you for it.