Sunday, January 26, 2014

Experimenting with penny stocks

NASDAQ:JOEZ
NASDAQ:JOEZ
A couple months ago I (specifically, when money from my 403(b) rolled over) I decided to invest in a penny stock. I wanted to see if it is actually possible to "make a quick buck" on penny stocks. So I bought 100 stocks of JOEZ. Joe's jeans is a high end jeans brand that is mainly sold in department stores, but also has its own stores. Within the high end jean collection, they are a popular purchase.

I read up on them, discovering the website seeking alpha in the process. They had just undergone a merger with Hudson Jeans, which seemed to me like a positive step (Hudson jeans are also very popular in the high-end jeans market). Well long story short, I haven't gained a penny yet.  My losses aren't huge either, but it is still disappointing!

After making this investment and seeing it do miserably I decided to do some more research on penny stocks (sometimes I like to do things backwards). 

After checking a couple websites, I have 3 main lessons learned:
1. Penny stocks are extra risky
2. Penny stocks often have a different status
3. Penny stocks can be deceiving

1. Penny stocks are risky
Wikihow has a great 12 step process for investing in penny stocks and the first step is about knowing the risks.  Penny stocks are risky because of a couple different reasons. First, there is generally a lack of information about the stock. Many penny stocks are not traded on the stock exchange meaning they don't have to file with the SEC and thus, do not need to follow the guidelines and restrictions of trading on the stock exchange. Lastly, penny stocks can be harder to sell; they are less liquid because there is the chance you won't find a buyer at your asking price for them.

2. Penny stocks often have a different status
As I mentioned before, some penny stocks are not traded on the stock exchange. They are most likely OCT (over the counter) stocks. These stocks do not adhere to the same regulations as regularly traded stocks.  Also, look at the history or the stock and signs of instability.  According to wikihow, "Look for delisting or signs of decay in more established penny stocks."

3.  Penny stocks can be deceiving
Since OTC stocks are not government regulated, you have to be your own regulator.  When researching a penny stock, be critical. Don't believe everything the press says. Go to the financials if they're available and do your own research.  Wikihow explains that one way fraudsters try to make money is by investing heavily in a stock and hyping it up, convincing novice investors the stock is a winner.  This deceit is one of many reasons you need to be careful.

For more information, especially regarding penny stock investing strategy, I recommend checking out the wikihow article. Another good resource is Investopedia's Lowdown on Penny Stocks.

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