Dave Ramsey's Investing Minute • November 15, 2011 | DAVERAMSEY.COM
Dave Ramsey's Investing Minute

November 15, 2011
Penny Stocks Are No Bargain
The Tip:
Penny stock prices are low for a reason—they're not worth the risk.

If you do much investing research, you've probably seen ads or emails about "hot penny-stock tips" that could make you a fortune almost instantly.

The Securities Exchange Commission (SEC) defines a penny stock as a low-priced, speculative security for a very small company—Red Flag #1. Usually priced below $5, penny stocks are traded over-the-counter, which means they're too high-risk to be included on the "big" boards like the New York Stock Exchange or the NASDAQ—Red Flag #2. To sell a penny stock, the SEC requires a broker-dealer to provide the customer a written description of their risks—Red Flag #3.

Why Penny Stocks Are a Bad Idea
If you didn't know anything else about penny stocks, all those red flags should be enough to keep you away from them. But lots of people think a low price equals a bargain and their money will go further if they buy more shares of a penny stock rather than fewer shares of a more expensive, stable stock.

In reality, penny stock investing is almost like gambling—and like gambling, one "hit" is all it takes to get some investors hooked. Penny stocks are extremely volatile, so folks who invest in them are usually glued to their phones and computers, so they can buy and sell at a moment's notice. But it's not as simple as it sounds:

  • Many penny stocks trade infrequently, so investors can't always sell them when they want to.
  • Penny stock companies often have low cash reserves, making it difficult to sell shares.
Scam Target
Penny stock "opportunities" are also often scams. Individuals or organizations will buy up a penny company's stock and send out positive but misleading information about the company to drive demand for the stock. When the stock price goes up, the scammers sell their shares, bringing the prices—and the scammed investors—back to earth.

The truth is, penny stock investing appeals to folks who want to get rich quick. So if you're following Dave's advice and investing for the long-term, there's no way you're going to consider penny stocks to build wealth.

Expert Advice for Real Investing
For real investing, consult an investing pro to help you build a portfolio of good growth-stock mutual funds with a history of strong performance. You can trust one of Dave's investing Endorsed Local Providers (ELPs) to have the heart of a teacher and give you the same great advice Dave would. Contact your ELP today!

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