When I first started investing, I fell into a trap that many new investors fall into. That trap is putting money into penny stocks.
Penny stocks trade at pennies for a reason. They are usually very small, unproven companies with questionable business practices as well as management.
I know it’s hard to resist the temptation of buying a developmental biotech, trading at 10 cents per share, that may have the cure for cancer. Hell, you could buy 100,000 shares and cash out at $100 when the company gets bought out!
However, the likelihood of that happening is slim to none.
Don’t get me wrong…there are a few companies that traded below $2.00 that became great investments. Most of these didn’t start off as penny stocks, though. They fell there because of a market crash.
It’s okay to take a flier on a young company that may have promise, meaning it has good management and real technology behind it. But try to stay above $1.00. And don’t make your entire portfolio consist of companies at or close to $1.00!