Depending upon your personal constitution, at some time or another you have probably been inclined to throw a little mad money in the direction of some of the more volatile – and potentially lucrative – stocks.
They can indeed be enticing if for no other reason than the ability to invest paltry sums with potentially stratospheric returns. So, what about the viability of penny stocks and over the counter securities? Is there anything wrong with having a little mad money stash just to have fun with? Not necessarily.
In fact, if handled correctly it might actually be possible to have a little fun and maybe make money along the way.
1. Volume Matters
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Nothing is worse than buying a stock that you can’t sell.
Take a look at the daily (or in some instances – weekly) volume to make sure there is someone on the other end of the transaction. Novice investors are often surprised how limited volume can be and are taken aback when their sell order isn’t immediately executed.
2. Sales and Earnings.
Yes, it sounds old fashioned especially in light of the pop culture investing mentality but fundamentals still hold true.
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3. Percentages Mislead.
Especially when dealing with micro or penny stock. It just makes sense. If a stock is trading at a $1 and doubles to $2 then the percentage alone skews the total picture. Remember the Law of Diminishing Returns.
4. Use Caution.
Setting aside a little mad money for those fun investment crushes is a great idea – just don’t go overboard. Depending upon the total size of your portfolio there isn’t anything
wrong with using 2% to 10% of your investment dollars to roll the dice and try out your luck.
For more information, head over to Wall Street Survivor.