2974: Penny Stock Debacle: How I Lost $5,000 and You Can (and Better) Avoid It by Jeff Rose of Good Financial Cents

[00:00:00] This is Optimal Finance Daily, Penny Stock Debacle, How I Lost 5,000 Dollars and How You Can and Better Avoid It by Jeff Rose of GoodFinancialCents.com

[00:00:13] I get sick when I think about that day and the mistake that cost me $5,000. I compare it to something in between smashing my thumb with a hammer to breaking your mother's most beloved piece of china. It is something that makes me sick just reliving it.

[00:00:28] I actually just puked in my mouth a little bit. Ugh. I've been a financial advisor for almost four years, so I should have known better. But thanks to a lot of greed and even more ignorance, I got my rear handed to me on a silver platter.

[00:00:43] The Temptation

[00:00:45] I was meeting with a client who was telling me a story about their daughter's boyfriend whose dad worked for some mining company. Do you see how bad this starts off?

[00:00:55] I usually make fun of people that would even entertain stories like this. And here I was caught up in the moment. Back to the story.

[00:01:03] The client was telling me how this company had just signed some new deals and since it was a penny stock, otherwise known as OTC or over-the-counter thinly traded security, there wasn't a lot of news about it.

[00:01:16] His theory was that this penny stock could soar pretty quickly.

[00:01:20] Don't you like how I'm getting advice from my client who really knows nothing about investing?

[00:01:25] And I'm really considering taking his advice about what the next stock is I'm going to buy?

[00:01:30] That has epic fail written all over it.

[00:01:33] I had some cash in my investment account, lucky me, so I thought I might as well give it a shot.

[00:01:39] Seriously, that was my logic. Might as well give it a shot.

[00:01:43] I should have hired one of these advisors to punch me in the face.

[00:01:47] I proceeded to place a trade to buy a certain number of shares of this stock that was going to make me millions.

[00:01:54] Huh, not even close, buddy. Not by a long shot.

[00:01:58] Buying an OTC stock. Whoops.

[00:02:01] When buying an over-the-counter stock, otherwise known as a penny stock,

[00:02:05] you must be sure to protect yourself and make sure that when you place an order to buy or sell,

[00:02:10] that you put a specific price on it.

[00:02:13] I unfortunately put an order in to buy at market.

[00:02:18] Translating, that means that I put an open order to buy,

[00:02:21] whatever price that someone is going to sell it to me for.

[00:02:25] If you think about it in eBay terms, instead of bidding on the price,

[00:02:29] I elected to buy now and the seller could increase the price if they so choose.

[00:02:34] In larger stocks that are traded on the New York Stock Exchange or NASDAQ,

[00:02:38] that's typically not an issue because the market will keep that price in check.

[00:02:42] In the over-the-counter market, it's a different story.

[00:02:46] An entirely different story.

[00:02:48] The wild, wild west.

[00:02:51] You can think of the OTC market like the wild, wild west of trading.

[00:02:56] Just because the stock is trading at $0.90 doesn't mean that you'll buy or sell those shares at $0.90.

[00:03:02] If I put a buy order in at market, that price could shoot up to $193, whatever their price might be.

[00:03:11] Essentially, that's what happened in my case.

[00:03:13] I had put in an order to buy, say, 2,500 shares.

[00:03:17] I don't remember the exact number.

[00:03:19] And a few hundred of the shares executed at what I thought was the market price.

[00:03:24] But I quickly and expensively learned that a lot of them issued at a price double of what I intended to buy it for.

[00:03:32] To make matters worse, after the trade settled, the prices were displaying what I thought I was paying for in the beginning.

[00:03:39] To summarize, I submitted a buy order for 2,500 shares of a penny stock at market,

[00:03:45] and I thought I was buying it for $0.90.

[00:03:49] I bought a few hundred shares at $0.90, but most executed at least two if not three times that.

[00:03:56] This means that I made an investment of $5,000 instead of what I thought was going to be $2,250.

[00:04:04] After the trade settled, the price reverted back to the original price of $0.90.

[00:04:10] If I sold it that day, I would take an immediate huge loss.

[00:04:14] If I'm doing a bad job of explaining how the system works,

[00:04:18] it is a further demonstration of why I have no business buying penny stocks.

[00:04:24] Chances are, if you're reading this, you fit that description too.

[00:04:27] So let's reflect on how I screwed up royally.

[00:04:31] Don't do as I do, but do as I say.

[00:04:34] Before you start trying to make yourself believe that you can make millions off buying penny stocks,

[00:04:39] take note of how I screwed up and how I let my overconfidence and flat-out ignorance get the best of me.

[00:04:46] Number one, I listened to advice from someone I had no business getting advice from.

[00:04:52] My client knew nothing about the stock, knew nothing about the company,

[00:04:56] other than what his daughter's boyfriend had told him.

[00:04:59] Whenever you're getting investment advice from someone, make sure you consider the source.

[00:05:04] Number two, I had no idea how the over-the-counter market works.

[00:05:08] This system works nothing like logging into my TD Ameritrade account and picking up a stock on the New York Exchange.

[00:05:15] It's more like traveling to Spain, going to a flea market,

[00:05:19] and trying to bargain with a vendor even though I don't speak the language.

[00:05:22] Chances are, I'm going to get screwed, just like I was in this situation.

[00:05:27] Number three, greed is not always good.

[00:05:30] I don't care what Gordon Gekko says.

[00:05:32] I was doing just fine making a decent return on my boring mutual funds,

[00:05:37] but the chance of quadrupling my money in a short amount of time got the best of me.

[00:05:42] That was the last penny stock that I've ever bought and will ever buy again.

[00:05:46] I don't care if my best friend's uncle's seamstress knows a guy that has an insider at some other company.

[00:05:53] Never again.

[00:05:58] You just listened to the post titled,

[00:06:00] Penny Stock Debacle, How I Lost $5,000 and How You Can and Better Avoid It by Jeff Rose of GoodFinancialSense.com.

[00:06:09] Remember the GameStop debacle?

[00:06:11] I am a long-term passive investor,

[00:06:13] so I was unfazed by the excitement and not tempted at all to join in on the fun.

[00:06:20] You can't see me, but I'm doing air quotes over here.

[00:06:22] Do hedge funds and investors make money by short selling?

[00:06:26] Totally.

[00:06:27] But from my perspective, it's overcomplicated and risky to play a game that includes terms like hedging,

[00:06:34] call options, float, and strike prices.

[00:06:37] Do you even know what those things are and are you confident that you can navigate them skillfully?

[00:06:41] Yeah, me neither.

[00:06:43] Now don't get me wrong.

[00:06:44] I am thrilled for the people who made money off this short squeeze.

[00:06:48] However, there were many first-time investors that wanted to join the party

[00:06:53] but weren't experienced enough in this type of trading to know when to get out before they would take a huge loss.

[00:06:59] The way I look at investing is that there's a way to invest that's relatively safe.

[00:07:04] You stash your money away for the long term in low-fee total market index funds

[00:07:09] and you passively set it and forget it.

[00:07:12] You don't conjure up strategies driven by greed to beat the market

[00:07:16] because you don't need to beat the market to meet your financial goals.

[00:07:20] You just need to match the market because the market has proven to always go up over the long term.

[00:07:27] It's the best way to let your money grow and protect it against inflation.

[00:07:31] Now while the market always goes up over the long term,

[00:07:35] in the short term it's a roller coaster ride of highs and lows

[00:07:39] and there are ways to profit from this.

[00:07:41] However, oftentimes these short-term strategies look a lot more like gambling than level-headed investing.

[00:07:49] And this isn't a moral judgment here.

[00:07:51] I'll play a roulette table in Vegas for fun every now and then.

[00:07:54] But the point is, it's just for fun.

[00:07:57] It's not really a sound financial strategy for most of us.

[00:08:02] And that should do it for today.

[00:08:04] Have a happy rest of your day and I'll see you in the Thursday show tomorrow

[00:08:07] where your optimal life awaits.