Penny Stocks: Have we gone too far?!?!

Penny stocks are kind of scary. Although the rewards can be high, the risk is up there too. Everyone always pays attention to the high reward end of that statement. So is it worth it for us to try and get in with this as an experiment? In the very least, it is worth trying to learn a bit about them. Aside from the stock losing value, it may be an issue even finding someone to purchase the stock from you, which is something we hadn't even considered.

One of our members has had some success with stocks in the $2-3 range. He picked a specific industry and selected a few stocks to watch over the course of a few weeks. This gave him some idea of how the stocks were performing and fluctuating over time. He bought some shares of a few of them and played around over a couple weeks. He ended up making a profit, even though some of his stocks tanked. He took a pretty conservative, for example, if a stock went up 5%, he'd sell it before he lost his (tiny) shirt. Given the volumes, if something went up 1.5% it was enough to recoup the trading fees, which is something to note. Obviously, if you sell something at the price you bought it, you've made a loss because of those fees.

One approach might be to purchase some penny stocks and set automatic sell orders at some agreed-upon dip or jump. At the low end it is a fear of losing too much, and at the high end it is meeting our goal. That way we could get out of something before it has a chance to jump down or we can ensure some profit if it goes up. For example, if we know something normally fluctuates 5% every day, we dump it at a 6%dip and sell it at a 6% jump. The idea is that if it goes down that low, we get out before we lose too much, and if it goes up that high, we've gotten what we want out of it, without being greedy.

Without knowing exactly whether we are taxed on the fees as well, we will assume that we ARE taxed on everything. If we did $500 of this, trading fees are about $15($7 on each end). If we want to break even (after fees), we would need to make a 3% profit. Then you factor in capital gains (about 40% because this is a short-term investment), so that means we need to make a little more.  Quick math says we need a 5% profit on $500 to get past the gain tax and fees.

Next week we will start analyzing the items used in our member's previous experiment.  That'll at least give us somewhere to start.  We'll look at their history and see what we can make of it.