105: Penny Stocks: Buy In or Beware?

Have you ever heard about penny stocks? Are you wondering what they are and if you should be getting in on that action? We’re covering everything about penny stocks in this episode of Wealth by Design, so buckle up.

Warning: we do not shy away from our opinions about penny stocks in this episode!

 

WHAT YOU’LL LEARN [01:20] What is a penny stock?

[03:01] How Dustin was introduced to penny stocks

[06:10] The reality of Dustin’s dot com story

[08:19] Common misconceptions with penny stocks

[09:54] The type of investment strategy you should have

[10:34] Why penny stocks exist

[12:10] All about pump and dump scams (yes, like in The Wolf of Wall Street)

[14:22] Our final verdict on penny stocks

 

What Are Penny Stocks?

Penny stocks, as their name implies, are stocks that trade for less than $5 per share. You’ll find lots of penny stocks that cost less than a dollar or even less than a penny. Of course, that’s part of their appeal. These cheap stocks seem attractive when compared to companies that trade at much higher amounts. But you may have heard people (or “influencers”) talking about how they’re making money fast on penny stocks and you may be wondering if you need to get in on the scheme. We’re here to talk you down.

The Draw of Penny Stocks

In this episode, we mentioned the “viral” factor when it comes to penny stocks. It might seem like everyone around you is talking about a specific penny stock and making money on it. Eventually, you start to feel the pressure. Should you become a ground floor investor? Will you hit it big with this underdog company?

It’s natural to feel that adrenaline rush when you think you may have discovered a “diamond in the rough,” as we described it. But we’re going to play devil’s advocate for a moment and bring you back to reality. A good long-term investment strategy should never make you feel pressured into buying anything. Investing should never feel like a potential lottery win. You want an investment strategy that’s stable and disciplined, not one that’s volatile and hard to research. That’s what penny stocks are, however, and those are huge red flags.

If you hear your friends, coworkers, or acquaintances talking about “the next big thing” in stocks, be wary: it might be a pump and dump scam. (You may have heard of pump and dumps in 2013, thanks to The Wolf of Wall Street movie based on the real-life Wolf of Wall Street, Jordan Belfort.) Be on the lookout for penny stocks that seem like they’re on fire at the moment. That’s a pretty good sign that they’ll burn out quickly, and that they’re actually worthless. 

How Penny Stocks Actually Work

We hear you wondering: “If penny stocks are so unpredictable, why does anyone even invest in them?” We’ve already talked about why people might take a chance on penny stocks: the FOMO, the rush of adrenaline, and the desire to feel like you’re a ground floor investor in an underdog company. Now let’s look at the company side of things.

Penny stocks are not arbitrary. They may be companies that have failed and are now actually worth pennies. Companies that have failed but still have some type of worth tied up in their business, like tons of land, for example. On the other hand, companies may start out as penny stocks, which can be even worse! 

Companies who start out as penny stocks can manipulate their price purposefully to skirt regulation. Penny stocks are called “over-the-counter stocks” since they don’t trade on a regulated exchange, like the Nasdaq or New York Stock Exchange. Instead, they’re traded in an OTC exchange. And when you’re dealing with companies who manipulate prices and skirt regulation, it’s the Wild West out there, as Dustin put it. It’s a lawless place that you should avoid.

Our Final Verdict on Penny Stocks

Technically, we’re not allowed to give specific investing advice. But we made an exception for this topic. How do we feel about penny stocks? DON’T. BUY. THEM. You’ll hear us get pretty emphatic about this in the episode. 

Buying penny stocks is the opposite of the kind of investing strategy we want you to have! We want you to have a diversified, disciplined, long-term investing strategy. You won’t find that with penny stocks. Just don’t do it, folks. 

This material is for general information only and is not intended to provide specific advice or recommendations for any individual.

 

Resources & People Mentioned Episode 104: The Laws of Human Nature  The true story behind The Wolf of Wall Street One of our many resources: A blueprint guide to wealth The Toujours Planning Quiz — Are we a good fit for your financial planning needs?