Penny Stocks: Friend or Foe

The Denver and Canadian markets list many stocks that trade for pennies per share. These seemingly cheap securities are more appealing now that we are all a little short on cash. However, there is a usually a flip side to whatever seems like a really good deal and penny stocks are no exception. William O’Neil, in his most recent book “HOW TO MAKE MONEY IN STOCKS, Complete Investing System” when discussing penny stocks, states, “I strongly advise that you avoid gambling in such cheap merchandise, because everything sells for what it’s worth. You get what you pay for.”
Although it seems like we could buy a very large quantity of these stocks even with the limited funds that we have available, the penny stock market is fast-moving and volatile which makes it very difficult to make a high-volume trade at your desired offer price. The market may get away from you and you could end up buying at a higher price than you wanted to pay and selling well below the price that you need to make a profitable trade. You have to add to the mix that if you are buying or selling a large quantity of stocks in this market, you can also move the market against yourself and end up making even less on the trade.
However, if you happen to own some penny stocks at this time, I feel that it would be best to use the 10% loss-cutting plan (as advised by Bill Astrop, President of Astrop Advisory Corp. in Atlanta, Georgia). I think that individual investors should sell half of their position in a stock if it is down 5% and the other half once it is down 10%. This strategy should assist you in preserving remaining funds with which to further invest.