I heard a great story about Warren Buffett recently. One day Warren was riding in the elevator at his office in Omaha. A few other people got on the elevator as well. In the middle of the floor was a shinny penny. Everyone had a chance to pick it up, but nobody did. Finally after a few seconds Warren reaches down and picks it up. He looked at it for a moment then slipped the penny into his pocket.
Rumor has it, he said "the start of my next billion" as he put the penny in his pocket.
I don't know if the story's true or not, but it sounds like something he would do. We all have dreams of turning pennies into millions (or billions in Warren's case). Some people have a knack for making money out of almost anything.
In the stock market, there's a high risk, high reward way to make lots of money.
Investing in Penny Stocks.
Now before you question my sanity let me ask you a question? Have you ever traded penny stocks? Do you even know what a penny stock is?
There are hundreds of definitions for a penny stock. Some investors think very literally. Only stocks that trade for pennies a share are penny stocks. The US Government defines penny stocks a little more liberally. Here's the quote right from the SEC website:
The term "penny stock" generally refers to low-priced (below $5), speculative securities of very small companies. While penny stocks generally are quoted over-the-counter, such as on the OTC Bulletin Board or in the Pink-Sheets, they may also trade on securities exchanges, including foreign securities exchanges. In addition, penny stocks include the securities of certain private companies with no active trading market.
Look, forget all that legalese and government mumbo jumbo.
For me a penny stock is a publicly traded company whose entire market value (their market cap) is very small. See, stocks are classified according to their size. Large cap stocks are worth more than $50 billion. Mid cap stocks are worth $10 to $50 billion. Small cap stocks are worth $1 to $10 billion. And micro-cap stocks or penny stocks are worth from $50 million to $1 billion.
How do you classify companies worth less than $50 million . . . I call them hobbies!
Seriously, if you're able to invest heavily in one of these micro-cap penny stocks just as it starts to grow, you can make some serious money.
Do you want an example?
About a year ago I was doing some research on the coal industry. If you don't know, coal's one of the biggest sources of energy for the United States. Some people have even crowned it "King Coal" and called the US the Saudi Arabia of coal.
To say we have lots of the stuff is an understatement.
While I was doing some research I came across a very interesting company, James River Coal (JRCC). The company was founded in 1988 and produces coal for sale to electric utilities and industrial consumers. They have 6 mining complexes, 26 underground and surface mines, and 10 preparation plants. All told the company has more than 265 million tons of proven and probable coal reserves.
Not bad for a little company that in August of 2007 was selling for less than $5 a share.
James River Coal was a penny stock. The entire company was worth less that $125 million dollars.
Coal prices however were starting to go up and up and up. And do you know what went up and up and up along with prices? That's right, the stock prices of all the coal companies. Not just James River Coal but some of the big players too. Companies like Arch Coal (ACI) and Massey Energy (MEE) watched as their stock climbed.
So how can you make money trading these penny stocks?
The stock for JRCC was stuck below $5 for months and traded below $10 for almost half a year. You could have bought all you wanted.
Then as oil prices and coal prices best penny stocks started to climb the stock just took off. In less than a year the stock skyrocketed from penny stock status to more than $60 a share. You read that right . . . more than $60 a share.
JRCC returned more than 1,100% in less than a year!
Now you'll notice the stock's recently fallen in price. That's no doubt due to many investors taking their huge profits off the table. Despite this recent correction, the stock's still up more than 500%.
Now you see how investing in penny stocks can be so valuable?
Don't forget, like anything, investing in a penny stock does have some risk. Make sure to do your due diligence and discuss with your broker all the risks and potential rewards of penny stock investing.
