During the mid-aughts, fresh out of college, young, single and flush with cash I decide to invest in penny stocks. Penny stocks typically trade for, you guessed it, in the pennies for each share. They are very risky, trade Over-the-Counter (that is the name of the stock ‘exchange’ where they trade in, sometimes it is referred to as the ‘Pink Sheets’), and are lightly regulated. The lack of regulation makes them a susceptible for various fraud schemes such as the classic, ‘pump-and-dump’. However, if the right penny-stock begins to increase the margins for profit (on such a small investment) could be in the thousands!
Either way, I had invested about 500 dollars into a penny-stock called LOGO that was seeking to create a gay/lesbian themed TV network. I used to follow the stock and post in penny-stock forums and discuss the pitfalls, buy-points, sell-points of various penny-stocks (including LOGO). Thinking back on it, it wouldn’t surprise me if some of those people were plants, operating an online version of a “boiler-room”.
When I met with my financial adviser she gave me this look of horror and disgust. When I couldn’t explain to her why I bought Penny-Stocks or why I selected LOGO, her and I agreed to sell my penny-stocks and invest in mutual funds (which have since earned more money than my penny-stock).
Now, LOGO TV is actually a channel, though I am not sure whatever became of the penny-stock.
I write this post because Bloomberg Business has a great article that represents a ‘case-study’ on the perils and profits of penny-stocks.
Cynk was a company with 1 employee, no assets, and 0 revenue that became worth 6 billion dollars.
The take-away from my experience with Penny-Stocks (and what one person in the aforementioned article calls them) is that they should be treated as Lottery-Picks. If you like investing and want to invest in penny-stocks than do so but do so with moderation (500 dollars was way too much) and with the understanding that you are properly getting taken for ride and will not win.