Penny Stock Debacle: How I Lost $5,000 and You Can (and Better!) Avoid It

lose money penny stocksI 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.

I actually just puked in my mouth a little bit. <ugh….>

I had been a financial advisor for almost four years so I should’ve known better.

But thanks to a lot of greed and even more ignorance, I got my rear handed to me on a silver platter.

The Temptation

I was meeting with a client who was telling me the story about their daughter’s boyfriend whose dad worked for some mining company.

[Do you see how bad this starts off?   I usually make fun of people that will even entertain stories like this.  And here I was caught up in the moment.  Back to the story...]

The client was telling me how this company had just signed some new deals and since it was a penny stock, otherwise known as an OTC or over-the-counter thinly traded security, there wasn’t a lot of news about it.  His theory was that this penny stock could soar pretty quickly.

[Don’t you like how I’m getting advice from my client who really knows nothing about investing.  And I'm really considering taking his advice about what the next stock is I’m going to buy?  This has "epic fail" written all over it. ]

I had some cash in my investment account (lucky me!) so I thought I might as well give it a shot.

[Seriously, that was my logic:  "might as well give it a shot".  I should have hired one of these advisors to punch me in the face.]

I proceeded to place a trade to buy a certain number of shares of this stock that was going to make me millions.

[Hah.  Not even close buddy.  Not by a long shot.]

Buying an OTC Stock – Woops

When buying an over-the-counter stock, otherwise known as a penny stock, you must be sure to protect yourself and make sure that when you place an order to buy or sell, that you put a specific price on it. I unfortunately put an order in to buy “at market”.

Translating, that means that I put an open order to buy whatever a price that someone is going to sell it to me for. If you think about it in Ebay terms, instead of bidding on the price, I elected to “Buy Now” and the seller could increase the price if they so choose.

In larger stocks that are traded on the New York Stock Exchange or NASDAQ, that’s typically not an issue because the market will keep that price in check.  In the over-the-counter market, it’s a different story.  An entirely different story.

The Wild, Wild West

You can think of the OTC market like the Wild, Wild West of trading.  Just because the stock is trading at $0.90 doesn’t mean that you’ll buy or sell those shares at $.90.

If I put a buy order in “at market”, that price could shoot up to $1.90, $3.00;  whatever their price might be. Essentially that’s what happened in my case.

I had put in an order to buy say 2,500 shares (I don’t remember the exact number) and a few 100 of the shares executed at what I thought was the market price.  But I quickly and expensively learned that a lot of them issued at a price double of what I intended to buy it for.

To make matters worse, after the trade settled, the prices were displaying what I thought I was paying for it in the beginning.  To summarize:

  • I submitted a buy order for 2500 shares of a penny stock “at market” and thought I was buying it for $.90.
  • I bought a few hundred shares at $.90 but most executed at least 2 if not 3 times that.
  • After the trade settled, the price reverted back to the original price of $.90.  If I sold it that day I would take an immediate huge loss.

If I’m doing a bad job of explaining how the system works, it’s a further demonstration of why I have no business buying penny stocks. Chances are if you’re reading this, you fit that description, too, so let’s reflect of how I screwed up royally.

Don’t Do as I Do, But Do as I Say

Before you start trying to make yourself believe that you can make millions off buying penny stocks, take note of how I screwed up and I let my over-confidence and flat out ignorance get the best of me.

  • I listened to advice from someone I had no business getting advice from. My client knew nothing about the stock, knew nothing about the company, other than what his daughter’s boyfriend had told him. Whenever you’re getting investment advice from someone, make sure you consider the source.
  • I had no idea how the over-the-counter market works. That’s like traveling to Spain, going to a flea market, and trying to bargain with a vendor even though I don’t speak the language. Chances are I’m going to be screwed just like I was in this situation.
  • Greed is not always good. I don’t care what Gordon Gekko says, I was doing just fine making a decent return on my boring mutual funds but the chance of quadrupling my money in a short amount of time got the best of me.

That was the last penny stock that I’ve ever bought and will ever buy again. I don’t care if my best friend’s uncle’s seamstress knows a guy that has an insider at some other company. Never again…

Have you invested money into something that you didn’t understand?

photo credit: bitzcelt via photopin cc

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Comments | 9 Responses

  1. says

    Jeff, sorry for your pain, but that’s a great story and excellent object lesson for your readers. I think everyone (including me) learns the hard way, as you did, that market orders may not execute at what appears to be the current market price, so don’t be too hard on yourself. Of course the same is true of market sell orders, so we’ve got to be equally careful!

  2. says

    Wow, that sucks. Sorry you lost your money but at least you were able to learn from it and turn it into a lesson to not invest in something you don’t understand.

  3. says

    Wow, Jeff. That is horrendous news. I’m really sorry to hear about that.

    I always knew penny stocks were risky, but I never considered the risks of placing a “market order” on them — but it’s an extremely valuable lesson for the rest of us.

    Here’s hoping that stock price takes off in the coming weeks and months.

  4. says

    This is so brave of you to accept and share your story of failure so everyone will learn also and will not commit the same mistake. This surely is a big help to everyone.

  5. says

    Sorry to hear about your $5K loss — but, on a somewhat-related tangent, I definitely give you props for telling that story in such an entertaining way!

    I know someone who lost $10K when he made a risky commodities bet. He also took advice from someone that he shouldn’t have taken advice from, a speculator, and he did it with a large amount of money instead of a “small bet” like $500 or $1,000.

  6. Derek Timm says

    I just started investing a month ago. I didn’t have much to invest so I started with penny stocks. After I read more about them and was worried after I read all about them. Luckily for me, it was Excell Maritime (EXM). I bought at around .40 and sold for 1.00 but I am to nervous to try investing in penny stocks again, despite my LUCKY return. I now have a financial adviser and am not going to make gambling decisions!

  7. says

    Aww man. That hurts. But it happens to a lot of people. We’re not perfect and it’s quite normal to make mistakes. What matters most is to learn from it and share it to others so that we won’t do the same mistake.

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