I heard a great story about Warren Buffett recently. One day Warren was in the elevator to his office in Omaha. A few other people also got on the elevator. In the middle of the floor was a shiny penny. Everyone had a chance to pick it up, but no one did. Finally, after a few seconds, Warren reaches down and picks it up. He looked at it for a moment and then slipped the penny into his pocket.
He is rumored to have said “the beginning of my next billion” while pocketing the penny.
I don’t know if the story is true or not, but it sounds like something he would do. We all dream of turning pennies into millions (or billions in Warren’s case). Some people have the ability to make money from almost anything.
In the stock market, there is a high-risk, high-reward way to make a lot of money.
Invest in penny stocks.
Now, before you question my sanity, let me ask you a question. Have you ever traded penny stocks? Do you 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 United States government defines penny stocks a bit more liberally. Here is the quote directly from the SEC’s website:
The term “penny stocks” generally refers to low-priced (less than $5) speculative securities of very small companies. While penny stocks are typically traded over-the-counter, such as on the OTC Bulletin Board or Pink-Sheets, they can also be traded on stock exchanges, including foreign stock exchanges. Additionally, penny stocks include the securities of certain private companies without an active trading market.
Look, forget about all that legalese and government gibberish.
To me, a penny stock is a publicly traded company whose total market value (its market capitalization) is very small. See, stocks are ranked by size. Large-cap stocks are worth more than $50 billion. Mid-cap stocks are worth anywhere from $10 to $50 billion. Small-cap stocks are worth anywhere from $1 to $10 billion. And micro cap stocks or penny stocks are worth $50 million to $1 billion.
How are companies that are worth less than $50 million classified? . . I call them hobbies!
Seriously, if you can invest a lot in one of these micro-cap penny stocks just as it starts to grow, you can make a lot of money.
Do you want an example?
About a year ago I was doing research on the coal industry. If he doesn’t know, coal is one of the largest sources of energy in the United States. Some people have even crowned him the “King of Coal” and called the United States the Saudi Arabia of coal.
To say that we have many things is an understatement.
While 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. In total, the company has more than 265 million tons of proven and probable coal reserves.
Not bad for a small company that in August 2007 was selling for less than $5 a share.
James River Coal was a penny stock. The entire company was worth less than $125 million dollars.
However, coal prices were starting to go up and up and up. And you know what went up and up and up along with the prices? That’s right, the share prices of all the coal companies. Not just James River Coal, but also some of the great players. companies like arc coal (ITA) and massey energy (MEE) watched its stock rise.
So how can you make money trading these penny stocks?
JRCC shares stayed below $5 for months and traded below $10 for almost half a year. You could have bought everything you wanted.
Then, when oil and coal prices started to rise, stocks just took off. In less than a year, the stock skyrocketed from penny stock status to over $60 a share. You read well. . . more than $60 per share.
JRCC returned over 1,100% in less than a year!
You will now notice that the stock price has recently gone down. No doubt that’s because many investors took their huge profits off the table. Despite this recent correction, stocks are still up more than 500%.
Do you now see how investing in penny stocks can be so valuable?
Don’t forget, like everything, investing in a penny stock carries some risk. Be sure to do your due diligence and discuss with your broker all the risks and potential rewards of investing in penny stocks.