A Humbling Mistake

I keep my dumbest investment as a reminder of what a true pump-and-dump stock is. I will never sell it — at this point, why bother? I have 49,600 shares valued at ... $0.0001 per share.

The experience has made me think twice before I hit the buy button, and I often go back and double-check everything before I buy any stock. Luckily for me, it wasn’t a very costly mistake — just a humbling one — J.W.S., online

The Fool Responds: You’re not alone in having fallen for a penny stock (one trading for less than about $5 per share). The numbers can seem appealing, such as if you can get 50,000 shares for just $1,000, when a stock trades for $0.02 per share. It can seem very unlikely that the stock will fall further, but as you’ve found out, it can.

Pump-and-dump schemes are rampant with penny stocks. A manipulator buys shares in a penny stock and then hypes it online or in newsletters, luring others into buying the stock and sending the share price up. Then the manipulator sells his shares, sending the stock sharply down, and burning those who fell for the hype.

Many penny stocks are tied to small, speculative companies with no track record of profitability or reliable growth. Steer clear. Remember that $300 shares of a healthy company can soar over time, while a $0.05 stock can still plunge.