Why Penny Stock Fortunes Are Rarer Than Lottery Winners

2011 January 31
by Kyle Bumpus
from → Investing And Investments

In the world of investment, an overnight success is almost a stark impossibility. Some investment analysts may promise their clients sudden wealth from penny stocks but the truth is that penny stock fortunes are rarer than winning the lottery. Nobody gets rich on penny stocks despite the hype. People need to understand this clearly and learn to stop hoping to make a large profit by buying penny stocks.

The very idea that people can make quick money in the stock market is opposed to the concept of stock market investing. Investing in the stock market is a long-term thing. There is no short cut to making money in the stock market. Instead, investors should learn to look at the big picture. This is what Warren Buffett does and this is why he is still one of the richest men in the world today.

Usually, when people invest in the stock market, they do so with a number of things at the back of their minds. They hope to receive dividends or bonus shares as return on investment. If this is true, (and it is) then it makes sense to assume that only well established companies can afford to pay dividends or offer investors bonus shares. Penny stocks are usually associated with new corporations or struggling outfits, which are not doing that well and so are unlikely to pay dividends.

Again, investors can invest for capital appreciation as well. This means that over a long period of time, the price of a particular stock can really rise. When this happens, the investor can sell some or all the stocks and raise capital for other ventures. It has to be pointed out that it takes time for the price of any stock to rise to significant levels. A very good example will serve to illustrate this clearly.

Warren Buffett, perhaps the investor most heralded by the “get rich in stocks” crowd, took over Berkshire Hathaway in 1965. If anybody had invested just $10,000 in the company at that time, by now that investment will be worth more than $20 million. The relevant point, though, is that it took over 40 years to get there. ┬áNow, $10,000 in 1965 was not exactly peanuts. So, the fact remains that there is no sudden wealth to be found in the stock market.

Objectively, the best penny stocks are the ones, which are considered, undervalued. This means that the shrewd investor needs to study the market with an eagle eye. If a company has a good product and a sound management, chances are, the company will grow in future. Therefore, if people buy the stocks of that firm, it would not just be because the price of the stock is low.

Over the years, a lot of people have fallen victim to one form of penny stock fortunes scam or the other. Such people have two things in common. First, they were greedy. Second, they were looking for quick money. Greed and impatience are two things, which will always lead to problems for unwary investors.

As stated already, it does not make much sense to buy stocks just because the price happens to be low. The best approach for investors would be to invest in blue chip stocks. In some cases, promising low price stocks can also be recognized and bought as a long term investment. Buying penny stocks and hoping for a sudden increase in price will not work because penny stock fortunes are rarer than winning the lottery. Nobody gets rich on penny stocks despite the hype.

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