Investing 104: Low-Cost Investments, BIG Rate of Return

True or False…In order to net a significant return on investment you must “trade like the big boys” and invest a large sum of capital.

The answer, of course, is false. However, a little perspective goes a long way.

For most people who are new to investing, the axiom “it takes money to make money” generally means you have to invest large sums of capital in the stock market in order to see a large rate of return trading stocks. Potential investors who share this point of view typically ignore the world of penny stocks.

Penny stocks are stocks of smaller companies that are traded “over-the-counter” directly from brokerage firms.  Such stocks are issued by companies that either don’t have enough market exposure, don’t have enough capital (total assets) or have been de-listed from the NYSE because they lost their high credit rating.  This doesn’t mean that penny stocks are bad investments.  It simply means penny stocks are riskier investments because information about such companies is usually very scarce.

You can find most penny stocks on the newly revised Over-the-Counter Bulletin Board (OTCBB) now known as the Financial Industry Regulatory Authority (FINRA) or on most regional exchanges.  The new FINRA OTCBB has learning tools for beginning investors and industry leaders alike, as well as, the latest market industry news, fraud alerts, stock tickers for both the big boards and small/micro-cap (penny stock) investment options.  However, it still pays to do your homework before investing in any company’s stock. The best place to start is by reviewing the company’s quarterly Form 10-Q report, its annual Form 10-K report or their Form 8-K report which lists periodic events of significant importance as required by the Security and Exchange Commission (SEC).

It doesn’t take a ton of money to get started in investing especially with penny stocks. You could start either by opening an account with an online broker (i.e., TD Ameritrade, Etrade, Charles Schwab, etc.) or you could participate in a direct investment plans (DRIPs) where deposits are made into an investment account and stock is purchased once the account balance reaches sufficient levels to purchase stock.

Most people learn about penny stock through mass email submissions. Such emails play up the large financial gains a small investment in penny stock could yield. It’s not uncommon to read reports claiming gains of 100% – 900% increase in profits from their initial investment. While it is true that you can recognize big profits from a small invest in penny stocks, it’s important to remember three very important things when making such an investment:

  1. Invest like a speculator. Always keep in mind that you’re investing in penny stocks for the short-term. Your goal is always to make a quick return on investment (ROI) and get out ahead of losing any significant financial gains. This is where knowing how to read stock charts comes into play.

  2. Know how much you’re willing to risk. If you’re unwilling to accept losing your investment, then odds are investing in penny stocks is not for you because chances are you’ll lose more often than you’ll win with such risky investments.  The key here is know your limit and only invest as much as you can afford to lose.

  3. Know when to cut your loses. Because trading activity with penny stocks is so fluid, it’s important that you buy into a system to help track the movement of your high risk investment. The speculative investor is constantly monitoring his/her investment to know when is the right time to buy or sell due to the volatility of the market. Therefore, it’s important to know when to cut your loses and walk away from the investment. Know when to hold ’em and know when to fold ’em.

That’s my blogpost for this week. Join the discussion by posting your comments below. And don’t forget to tune in next week where I’ll once again share more ways you can break the debt cycle and then go…beyond.

Zebert L. Brown

Zebert L. Brown is the author of Break the Debt Cycle in 3 Simple Steps and a 16 year Navy veteran with specialties in administrative management, career development and public relations. Follow him on Facebook and Twitter.

Tagged , , , , , , , , , , , . Bookmark the permalink.

Comments are closed.