Buying Cheap or Penny Stocks?

Cheap doesn't mean good. The old saying "Paying a peanut, you got a monkey". Cheap stocks are cheap for a reason. Stocks sell for what they’re worth.

So, which one is better? Buying 1 million shares of a $0.01 share or buying 1000 shares of a $10 stock? I think most people would agree the former because it seems like a good bargain, with more opportunity for big increases from owning more shares. Although this might be true when market is in the bull run but the money you make in a stock isn't based on how many shares you own. It's based on the amount of money invested. The more money you invested, the more you make or loss depends on the market situation.

Many novice investors have a love affair with cheap or penny stocks, but low-priced stocks are generally missing a key ingredient of past stock market winners: institutional sponsorship.

A stock can't make big gains without the buying power of mutual funds, banks, insurance companies and other deep-pocketed investors fueling their price moves. It's not this cheap shares that cause a stock to surge higher in price, it's big institutional block share trades of 100,000, 200,000 or more that cause these great jumps in price when they buy -- as well as great price drops when they sell.

Fund Managers or Institutional Investors account easily for majority of the trading volume each day on the stock exchanges, so it's a good idea to fish in the same pond as they do. Stocks priced at below $1 a share are probably not on the radar screens of fund managers or institutional investors, not to mention shares are less than 10 cents a share. Many of these stocks are thinly traded so it's hard for mutual funds to buy and sell big volume shares.

Beware: Cheap doesn't mean good. Cheap stocks are cheap for a reason. Stocks sell for what they’re worth.

In many cases, investors that try to grab stocks on the cheap don’t realize that they're buying a company mired in problems with no institutional sponsorship, slowing earnings and sales growth and shrinking market share. These are bad traits for a stock to have. Institutions have market research teams that seek out great opportunities, and because they buy in huge quantities over time, consider piggybacking their choices if you find these fund managers have better-than-average performance.

The reality is that your prospect of doubling your money in a cheap or penny stock sure sounds good especially during the bull run, but bear in mind that penny shares are usually suffer the most when market crashes. Unfortunately, novice investor are usually the one get caught when market crashes or situation turn against them because penny stocks usually fall the hardest when market crashes.

So, since this is your hard earned money, please do your home work. Invest wisely. Focus on institutional blue chips or quality stocks. Buying penny shares without looking into the fundamental is just like buying lottery or lotto and hope for the best. Buying share is not like buying lottery, it's about future investment of your money. Don't regret for not knowing the danger or pitfall of buying cheap or penny shares. Beware!

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