Penny Stocks For Dummies. Peter Leeds

      ❯❯ Hiding money under your mattress: Barring a house fire, you won’t lose your principal with this savings strategy, but you won’t gain anything, either. Of course, even cash stuffed in your pillow will lose its purchasing power due to the effect of inflation.

      ❯❯ Certificates of Deposit (CDs): These investment vehicles have very low risk, but you get paid very minimally because they’re so secure. An investment of $100 may be worth only $102 a year later.

      ❯❯ Bonds: Government or corporate bonds expose you to minimal risk but have very low payouts. If you invest in bonds issued by riskier countries or companies, you can make a little more, but also increase the possibility of losing your money.

      ❯❯ Real estate: Property ownership has generally been profitable over time in most areas. However, the risk-reward ratio depends greatly on the area and your timing. Florida condo ownership was very profitable for a long time – until home prices collapsed and many people lost their shirts. Real estate investments also entail significant carrying costs (property tax, insurance, condo fees), and when you sell you face numerous disposition fees (real estate agent commissions, land transfer tax).

      ❯❯ Blue-chip stocks: Big name companies are generally considered to be safe investments, but they can drop in value and very often do. Although blue chips generally provide better returns than CDs or bonds, they can also go down in price, and so the potential for greater returns comes hand in hand with increased risk.

      ❯❯ Midrange and small cap stocks: These investment vehicles are riskier than blue-chip stocks and safer than penny stocks, making them a good option for people who aren’t quite ready to trade very small, highly speculative companies associated with the tiniest of shares.

      ❯❯ Penny stocks: Penny stocks offer the perfect mix of risk and reward for many individuals. You can push the odds of making money strongly in your favor by using the techniques I describe in this book. Plus, penny stocks are easier to understand than complex strategies required for options trading and they have the potential for bigger returns from smaller investments, when compared to other investment types.

      ❯❯ Options and derivatives: These extremely risky investment vehicles are only appropriate for complex hedging strategies. If you don’t understand what I mean by “complex hedging strategies,” then you shouldn’t trade options.

      ❯❯ They can’t fall much lower. If a stock falls to pennies from several dollars or more, some investors wrongly believe that the shares can’t go much lower. Don’t make the mistake of comparing any stock to where it was before, because the stock has no memory, and past levels have no bearing as to where it may go from here. For example, even a stock that fell 99 percent – from $5 to 5¢ – can go a lot lower, and might just be on its way to 0.

      ❯❯ It’s not a big investment. If you invest $500 in a stock rather than $5,000, you’re risking less money (or, to use investment lingo, your downside is limited to $500). But the size of your downside has no bearing on whether the underlying shares are a good investment. If your reasoning is that you didn’t invest a lot, you’re gambling. If you buy a stock because it has an outstanding management team, low debt load, and expanding market share, you’re investing.

      ❯❯ The downside is smaller than on blue-chip stocks. Just because penny stocks are closer to zero than large blue-chip stocks or more expensive shares, it doesn’t mean that they are less risky. A $455 stock can go to 0. A 4¢-penny stock can go to 0. In either case, you can lose 100 percent of your investment.