We get asked on a daily basis if we would trade a penny stock and the answer is always the same "Absolutely Fucking Not." I don't pardon my french either, but why? When it can go up 100% a day? That might be all great and dandy in a perfect scenario but with trading penny stocks that is never the case.
There is this thing call Risk, that most people who go to penny stocks don't understand, if I am investing in something where my gain is potentially 100%+, I am going to have to put on some risk to achieve that gain, no one is just going to hand me this amazing return without a fight. One would assume that even on the low end your risk could be as high as losing 50% of your investment to achieve this 100% return.
Now I will lay out two examples below and you can pick your poison based off a $1,000 investment:
Ex 1 Penny Stock trading at $1
You can purchase 1,000 shares at $1
Your stop is $0 since most brokerages wont allow a stop order on stocks under $5, so your risk is essentially the entire $1,000 investment but say if your lucky you can sell it for a loss at $.50 for a $500 loss
Target is $2 a gain of $1,000
You have basically one shot, either it goes to $2 and you make $1,000 or the trade fails and you loose 50% or more. If you are luckly enough to get out of this position for only a 50% loss, it would now require you to achieve a gain of 200% to just BREAK EVEN!
Ex 2 a real stock such as a stock listed on the Nasdaq (PYPL)
We bought PYPL as it broke out through $36 last week, if you only had a $1,000 that would have bought you a mere 27 shares. In a weeks time the stock went to $41 where we took some profit. With your 27 shares x $5 profit would be about $100 profit a mere 10% in a weeks time. Nothing compared to the dream of a 100% right? But this is where RISK comes to matter and keeps us in the game.
If that trade failed we had a $.25 stop loss in at $35.74. So if the trade failed we lost a mere $7 ($.25 stop loss X 27 shares). If the trade failed we still had $993 left and could try another trade. Risking $10 to make $100
How many times do you think you could do that with penny stocks when the BID:ASK spread can be greater than 10%? If you don't know what the BID:ASK spread is, than you need to do more research before investing even $1.
There are maybe 5 people in the world who make a 6 figure income off penny stocks and will tell you it is only scale able to a certain point meaning there is only so much profit you can make on such cheap share prices. If you don't believe me, and think your going be the next one to hit it big trading some penny stock,email me personally (firstname.lastname@example.org) and if you are able to be profitable after 5 penny stock trades, I will personally match your profits no questions asked. If you loose your money you will own nothing to me but know that I was trying my best to steer you away from the suckers bet.