I heard a great story about Warren Buffett recently. One day, Warren was in the elevator at his office in Omaha. Some 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.
Rumor has it that he said “the start of my next billion” as he pocketed 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 on almost anything.
In the stock market, there is a high-risk, high-reward way to make big 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 loosely. Here is the quote directly from the SEC 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. Also, penny stocks include the securities of certain private companies without an active trading market.
Look, forget all that legal jargon and government gibberish.
To me, a penny stock is a publicly traded company whose total market value (its market capitalization) is very small. Look, 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 $50 million to $1 billion.
How are companies worth less than $50 million classified? . . I call them hobbies!
Seriously, if you can invest heavily 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 researching 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 power companies 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 was trading for less than $5 a share in August 2007.
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 do 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 carbon (ITA) and Massey Energy (MEE) watched its shares rise.
So how can you make money trading these penny stocks?
JRCC shares have been below $5 for months and traded below $10 for almost half a year. You could have bought anything 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 have 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 dropped. No doubt that’s because so many investors took their huge profits off the table. Despite this recent correction, the stock is still up more than 500%.
Now do you see how investing in penny stocks can be so valuable?
Don’t forget, like anything, investing in a penny stock carries some risk. Be sure to do your due diligence and discuss all the risks and potential rewards of investing in penny stocks with your broker.