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Blog : The Problem With Biotech Penny Stocks
July 3rd, 2006
Biotech penny stocks, by their very nature, are not good investments. The only way to play them is short-term, getting in on dips and riding the volatility.
Sure, once in a while (meaning less than 10%) these companies can see out their business plan to it's conclusion. Very, very rarely.
Usually what happens is that they come up with a good story, raise a ton of money to do the research, then go about spending that money as quickly as they can. So, now this penny stock is running out of cash, but at least they are many millions of dollars further along in their research.
Their next step is to raise more money. After all, they've already sunk 50 million. "Now we're even closer to this big biotech breakthrough!"
So, they raise another few truckloads of cash. The problem with this is they raise the money through issuing more penny stock shares. That means the shares you already own become worth less (not worthless, worth_less). There are also a few thousand more interested parties who are now looking to get a piece of the profits. Before long, the company has sold itself so badly, and spent so much money, that even if they were to get that big breakthrough, the rise in share price would not be enough to even bring the original shareholders back to their breakeven point.
In the few instances that I have selected a biotech penny stock for subscribers of Penny Stock Insider, it was immediately after the underlying stock had a downside over-reaction. By this I mean the share price plummeted 30% or 60%, when it should have only fallen 15% or so.
Often times, when a biotech gets good news, the penny stock's price goes way to high, and when they get bad news, it goes way too low.
I would go into more depth explaining my philosophy on biotech penny stocks, but I think I can sum it up in a few words: "I don't like them."
There are many better places to make easier, less-risky profits in penny stocks. Learn about a few of these at my site, Peter Leeds and the Penny Stock Professionals.