This isn’t going to be easy for me but I have to admit something to the readers of this blog that I am not proud of. I got caught up in something with a colleague from work and it has to stop the moment I hit publish on this post.  Recently, I have been using hard earned cash to gamble in penny stocks that aren’t listed on these major markets.  These are not investments they are a pure gamble and I am pissed at myself for getting involved.

A lot of people do it, and I am not judging, but I do know I do not like the feeling of buying into a company whose financials are questionable.  If I am going to gamble (and anyone who follows me on twitter knows I love me some casino time) I am going to do it at the blackjack table.

I should make it clear I am only currently down a few hundred between realized and unrealized gains/loses.  This wasn’t something I was “doing” but rather, something I just got caught up in.  My true passion is for equities that are undervalued and have been increasing their dividend payment for 20+ years.  It isn’t the money that I am made about, but rather folding to the pressure of actually buying one of these terrible companies.

What is a Penny Stock? Where are a Majority Traded?

When most people think of stocks they think of the companies that I talk about during my monthly stock screening for undervalued dividend champions, however, there is a world beyond the Cokes, McDonalds, Wal-Marts.  The SEC defines a penny stock as,

a security issued by a very small company that trades at less than $5 per share. Penny stocks generally are quoted over-the-counter, such as on the OTC Bulletin Board (which is a facility of FINRA) or OTC Link LLC (which is owned by OTC Markets Group, Inc., formerly known as Pink OTC Markets Inc.); penny stocks may, however, also trade on securities exchanges, including foreign securities exchanges. In addition, the definition of penny stock can include the securities of certain private companies with no active trading market.

and they warn,

Penny stocks may trade infrequently, which means that it may be difficult to sell penny stock shares once you own them. Moreover, because it may be difficult to find quotations for certain penny stocks, they may be difficult, or even impossible, to accurately price. For these, and other reasons, penny stocks are generally considered speculative investments. Consequently, investors in penny stocks should be prepared for the possibility that they may lose their whole investment (or an amount in excess of their investment if they purchased penny stocks on margin).

There are some penny stocks like Sirius (currently trading under $5 a share) where you can trust their financials (however, whether you disagree with the value of the business is a post for another day), but then there are some shady shady companies.  One that I bought shares of literally traded for .001.  Yes, one-tenth of a cent!  But don’t worry their earnings will be fantastic if they ever release them.  Companies worth less than a buck for an extended period time are usually sent to the minor leagues of markets.  Investopedia provides a pretty good explanation of the system,

A security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, etc. The phrase “over-the-counter” can be used to refer to stocks that trade via a dealer network as opposed to on a centralized exchange. It also refers to debt securities and other financial instruments such as derivatives, which are traded through a dealer network.

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In general, the reason for which a stock is traded over-the-counter is usually because the company is small, making it unable to meet exchange listing requirements. Also known as “unlisted stock”, these securities are traded by broker-dealers who negotiate directly with one another over computer networks and by phone.

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Be very wary of some OTC stocks, however; the OTCBB stocks are either penny stocks or are offered by companies with bad credit records

How Did I get Suckered In?

As mentioned earlier, I was watching a colleague making pretty good money with very little effort in a short amount of time.  So I started piggy backing his trades which were mostly profitable.  I took a left turn on a few and like I said I am a down a few hundred (although I still have the equities).

Why am I NOT Trading Penny Stocks Ever Again?

If I want to gamble I’ll go to a casino!  I should reiterate that the amount that went into this venture was a fraction of what I put into my responsible and boring investment.  Notwithstanding, I was buying and selling intra-day with companies that had little to no history, and worse, I didn’t even open up a financial statement.

At this point, I am going to hold my remaining shares and wait for a pop or two and shut the door on OTC Penny Stocks.

Have you ever Traded Penny Stocks? How did you do?