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After one week’s hiatus, Clement is back with some great questions and answers. This week he discusses penny stocks, quarterly earnings, and the duality of investing.
Is it correct that for someone to ‘win’ in the stock market someone else has to ‘lose’?
It’s not exactly this way, but close.
If I buy a share of a company today, someone has to sell it to me. Meaning we have transferred future gains or losses from one person to another.
If the share I bought rose in value, I made some money. Did the person who sold me the share lose anything? Well, they lost potential gains. They didn’t lose money out of their pocket, but they lost out on the opportunity to make more.
The same happens when the share I bought loses value. In this case, I lost money, but the other person didn’t win money - the grabbed an opportunity to not lose the money I lost.
So it’s not a case of someone losing money when I win, but that me winning means someone else missed out on the opportunity to win, and vice versa. The zero-sum game here is not about actual money, but about opportunities.
Should I buy penny stocks?
This is not a question that can be answered properly without knowing a lot more about you, your situation, and other investments, among other things. This is what financial advisors are for.
However, here are a few thoughts on penny stocks, to help you make up your mind.
Penny stocks are high risk, high reward
Penny stocks are more dangerous than regular stocks. They have less liquidity, more speculation, and the possibility of your investment going to 0 is higher the smaller the company is.
However, they can also produce phenomenal returns, which is why people continue to be interested in this high-risk investment.
It’s not a get rich scheme
We’ve all seen the movies about how people got rich from penny stocks. Like many things you see in movies, it doesn’t work like that. Like all other investments, they can take time to materialize. If you think getting into penny stocks will turn you into the next Jordan Belfort - you’re wrong.
They are less regulated than regular stocks
Penny stocks do not report to the SEC the way regular stocks do. For this reason, it’s harder to find credible information, and there are more cases of fraud than in other markets. You can’t 100% count on the regulator to do the due diligence, and doing said diligence is harder than in other markets.
That’s it! I hope these three things will allow you to make a better decision regarding investing in penny stocks.
How often do you read the Quarterly Earnings Reports of companies you invest in? What information do you look for?
Every quarter, as soon as the report comes out.
You should know the next report date for every company you have in your portfolio, and these dates should be marked in your calendar. First, you never want to be surprised by a big post-earnings swing, without even knowing that a report is coming. Second, the initial reaction to earnings is often wrong and can reverse very quickly. Getting a grip on the report as it comes out can give you a leg up over many other investors.
As for what I am looking for, it depends on my investment thesis. For some companies, I look for growth metrics. I look to see how the revenue and earnings grew this quarter, and how it looks compared to historical growth and my own projections.
If I invested for the dividend, I check that nothing in the company’s report indicates that this dividend might be cut or eliminated. So usually the free cash flow is important, debt levels, and general ability to pay the dividend. Often you can see signs of a future dividend cut in the quarterly earnings report.
So in a sentence - read them all, as fast as you can, and check the critical numbers to see how the report impacts your investment thesis. A quarterly report is a great time to reevaluate strategies and theses, use it well!
If you have questions of your own you’d like Clement to answer, please leave them in the comments below or send them directly to Clement via Twitter - @ClemThibault.
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