MT3 | A Penny For Your Stocks

So last year, just before Covid ended any hope of future travel, we were wandering the streets of a quaint little town in Rajasthan, India, and we happened to spot this charming little jewellery store that sold beautiful precious stones. There were all kinds of colourful gems there – topaz, emeralds, rubies – but what caught my eye was this chunky, deep blue stone called London Topaz. I really took a shine to it. And the kindly old shopkeeper gave us some tea and explained how he has better prices than big-city jewellery stores because he mostly sells wholesale.

Wow, weren’t we lucky to have found this cheap, wholesale gem store? Of course, I had to buy something for my wife. So, despite her objections, I went ahead and sprung good cash for that lovely stone.

Well, you can guess how that turned out. Literally, 5 seconds of internet research that evening showed me that we paid at least twice as much as it was likely worth – and that’s assuming the stone is even real. It most definitely is because I’m definitely never taking it anywhere to have it assessed by an expert! And I might have learnt my lesson about buying things I know nothing about!

The stock market is a lot like that little shop. It has this way of making us think we’ve got a bargain when we’ve just got cheated. And this is happening a lot right now because the market is moving so erratically. New investors, especially younger folks are in such a buying frenzy that even stocks of bankrupt and fraudulent companies are soaring. And that’s what I wanted to discuss today.

Discussion Topics: A Penny For Your Stocks

• Stocks of failing companies are soaring
• Why are these penny stocks?
• Why are they suddenly going up?
• What happens if you hold on to shares in a bankrupt company?
• What could you do if you’re holding a penny stock right now?
• How to spot a good penny stock?

Transcripts: A Penny For Your Stocks

Hi, everyone, welcome to another episode of MoneyTok, where we help make personal finance and investing simple and accessible through both my own experience. I’ve been doing this for about 20 years now. This show is about money and wealth creation. And we talk about so many ways of making money, bought retirement planning about stocks, bonds, gold, real estate, crypto, so many kinds of things.

Stocks of failing companies are soaring

Bankrupt and failing companies such as JC Penney and Hertz are soaring as more and more small investors pile onto these cheap ‘penny’ stocks in a misguided attempt to buy low, sell high.

Why are these penny stocks?

A penny stock is a stock of any company that has typically been beaten down and is trading at a low price. In the US or Singapore that would be less than $1, in India it would be perhaps Rs 10 or less. This could be because they are failing or going bankrupt because they have been discovered to be committing fraud and the market does not trust their financials or because their business is simply not doing well and their prospects look poor.

Why are they suddenly going up?

There are three possible reasons for these stocks to be suddenly rising.

1. First, thanks to Robinhood and their 0-commission trading, most online trading platforms now offer free trades. This means anyone can trade stocks with very small amounts since there is no cost to the trade. So a host of newbies are now toe-dipping with small amounts, testing the waters with small trades in cheap stocks like these. But all those small trades add up to larger amounts of money flowing into the system, driving up the market and especially penny stocks.
2. The second reason is FOMO. People sitting on the sidelines are now afraid of missing this apparently great opportunity to make money and are piling in, trying to take advantage of this upward momentum. But they may not be able to time their exit, riding the wave up but then tumbling back down.
3. The third reason is market manipulation.

What happens if you hold on to shares in a bankrupt company?

Nothing good! As a shareholder, you come last in line to get any proceeds from the sale or liquidation of such a business.

1. First are secured creditors, who provided loans in exchange for collateral.
2. Then come unsecured creditors, like banks who may have offered business loans or lines of credit.
3. Then come bond-holders and last of all are shareholders.
4. Most likely any money or assets have been allocated long before your turn and all you’ll have to show for your investment is a cautionary tale!

What could you do if you’re holding a penny stock right now?

There’s really only one reason to continue holding on but in most cases, I’d say sell it at the earliest opportunity.

How to spot a good penny stock?

If you’re new to the stock market, I’d say just to avoid them and look for more established companies to buy into. But if you want to take a punt (with very little money please!) buy into stocks that may have taken a one-off hit due to unfavourable news or some sort of special circumstance that is clearly temporary and will not impact the core business.

UP NEXT

Over the next couple of episodes, we will address how to plan your finances to maximise your chances at a secure future and the fulfilment of (many of) your dreams.