Losing Money Pennywise
There is a class of investors who have an unusual propensity to go against the basics of trading by picking up penny stocks in hope of a big killing out of them. In their scheme of things caution is the dirty word. I remember some years back on a holiday I was sitting in the drawing room of one of very close buddies and having an argument on the merits and demerits of one of his picks which met all the characteristics of a penny stock- very low-priced, operators-driven, wildly fluctuating movements. The market was then in the grip of a bull run. As it happens and happened , the frontal blue-chip ones responded very enthusiastically followed by the mid-cap and penny-stocks.
My friend went almost lyrical on his lucky find! Rubbishing my mindset which he always considered to be conservative in the matter of investment, he was in an expansive mood with a sense of elation while furnishing the details of his gains on the good number trades he made on this counter over a period of three weeks. He made another investment pooling all his gains and the original investment with more money added to it. Within a span of another fortnight I visited him on another Sunday. This time I found him in awful mood. And the reason was too far to seek – his investment in the penny stock nosedived almost 40 percent! Since then there were several bull-runs but nothing changed the fate of his penny-stock and he is still stuck with his investments.
There are several websites and so-called experts giving you facts and figures highlighting the mind-boggling annual return of more than a few hundred percent. But you must remain wary of their motives and discreetly refuse to be lured into this dangerously mad game. There is a section of very unscrupulous operators in the market who surface during these bull-runs and trade in these penny stocks and the inexperienced and small retail investor getting overwhelmed by the feel-good factor in the hope of making a fast buck commit the cardinal mistake of buying these which ultimately turn out to be no better than junks!
The biggest problem involving these stocks is the absence of any credible information about their financial performance , management profile, pattern of shareholding etc. What drives the movement of the stocks in the market is pure speculation and once the bubble bursts they fall flat to the utter dismay and consternations of the investors. What is particularly disturbing is the appearance of articles in some leading financial papers and magazines giving prominence to these penny stocks which figure in the T and Z groups. The Z group stocks consists of companies which rank very low in terms of professionalism, redressal of investors' grievances etc. One needs to be very cautious about these kind of stocks.
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