Why Penny Stocks Aren't For You

You've heard of the monumental gains penny stocks can make, you've seen the great successes your co-worker had, and you've read about how many millionaires that last high-flyer created. That doesn't mean you're ready for penny stocks, and in fact it might mean that you would do best to stay far away.

It may sound counter-intuitive, but in actuality you may be setting yourself up to get burned. This is not because of what you heard, but rather due to what you didn't hear about.

When you were learning about the monumental gains that penny stocks make, you weren't hearing much about all the hundreds and thousands of losses, with many of these companies actually running into the ground, or declaring bankruptcy, or just losing their shareholder's money.

When you saw the great successes your co-worker had, you didn't witness all the losses he or she took leading up to that point, nor the upcoming mistakes that they will make on the next penny stock play.

When you read about all the millionaires that last high-flyer created, you didn't read about the thousand other penny stocks out there that did nothing for their traders, who lost more collectively than that one new millionaire made.

This is all because in life, and even more so when it comes to investing, and then even more so again when it comes to penny stocks, you don't hear about all the mistakes! You don't hear about the losses. You don't hear about the hundreds of low-priced investments that sank or traded flat, until their shareholders quietly exited their positions without telling the world.

In fact, a lot of times when you hear about an overnight millionaire from a penny stock investment, they were involved with the company from a management or owner or board of directors level. They already had tremendous holdings and plenty of penny stock options to boot. They didn't make their money from day trading some random penny stocks, but rather were a part of a corporation that "made the jump to light speed."

People have a way of touting their successes, while burying their mistakes. When it comes to losses in penny stocks, perhaps due to embarrassment or feeling like they made a mistake, many people will keep quiet.

Yet, rest assured that the moment they make even a small gain, they'll be signing about it from the rooftops. They'll tell all their friends. They'll sink their "winnings" into the next hot penny stock... only to lose a chunk of that change, and never speak about their mistake again.

So, while you hear about a lot of the upside, you don't hear about the much more common downside. If you are going to invest in penny stocks, make sure to do it right, by following an unbiased, professional analyst. Do your own due diligence, and start by paper trading or simulation trading before you risk a single penny.

If you do buy, and you get into the right penny stocks, then the journey can be extremely lucrative. The penny stocks that do go up in price usually do so in relatively short time frames, and the magnitude of those gains can be quite extreme.