Penny Stocks: There are some big success stories about penny stocks, and there are some stories that, despite the word “pennies,” also refer to big losses. Young investors, or those with limited resources, often enter the stock market by testing the waters with penny stocks. It sounds easy, and people wonder who can lose money by investing just a few cents.

One problem is that these actions can be contagious and attractive. The more someone owns, the more they want. And the more he or she is in the market, the more shares of different companies the investor discovers. Investment experts always talk about spreading purchases, dollar cost averaging, buying (and selling) over a period of time, and other investment rules that have been repeated for decades. But, a small or first time investor can get caught in many traps. Maybe he bought a couple hundred dollars worth of a penny stock and the price goes down a few cents (which can easily translate to 10 or 20 percent). There is a temptation to buy more. It lowers the average cost, of course; but it also makes the investor more involved. Conversely, if he goes up, the investor may be afraid of missing out and buy more to ensure they go up, assuming that is where the stock is going. On the other hand, an investor can get lucky with a penny stock, just like with stocks that are selling at higher prices.

Whether a stock is 30 cents or $30, the investor needs to do their homework on the company, keep an eye on it, look at its competitors and the industries it is involved in, listen to the experts, and then use common sense. If every child in the second grade at your school bought a new type of shoe, and the company’s stock was cheap, it might be worth an investment. But, if a cheap stock is now priced low after a long decline, or is very volatile, keep looking for something else.