In the early (mid?) 90’s I read the book Financial Freedom on $5 a Day. It was a long time ago, but I remember the effect it had on me. I was young, living in my parent’s basement and trying to figure out what to do with myself and that book changed my life.
For the Small Investor: Discount Brokerages
There was an entire section of the book devoted to discount brokerages. Discount brokerages were fairly new on the scene but they opened up the possibility of investing in the stock market with very little money, low commissions and a level of anonymity not available with a full service brokerage. It was a dream! I was going to become rich in the stock market.
I knew a bit about the stocks and investing. Enough to be dangerous? My dad and a group of his co-workers had been investing speculating in the stock market for a few years. Dad and I followed the markets together and on his lunch breaks Dad would call home and ask me to stand in front of the TV and call out the last trade price as reported by the stock scroll. (These were the days before the internet.) Dad invested with a full service broker, paid outrageous commissions and I imagine the broker probably giggled a little at my dad’s trading activity.
My Big Investment
I scraped together a few hundred dollars, marched down to the bank and opened a trading account. I did some research by reading the business section of the newspaper and found an interesting opportunity – Goldstake Resources (GXP on the Toronto Stock Exchange.)
At that time, penny stocks were on fire, especially resource based stocks. A company named Bre-X had “discovered” a massive gold field in Indonesia. I really wanted to buy Bre-X but the trading price was too high for my $200 budget. Goldstake resources on the other hand was only trading for about 70 cents and word on the street was that they had staked a claim right BESIDE the Bre-X property. In my mind this was a sure thing and my small investment was destined to become thousands of dollars. Maybe tens of thousands of dollars.
Eight or nine months later, Bre-X released news that they were sitting on one of the biggest gold finds in history. By this time, news had spread that Goldstake was going to be mining in the same Indonesian neighbourhood, and my shares shot up to $4.70. I could not resist and I sold. I remember the broker congratulating me on my sale. I had quadrupled my original investment.
Penny Stock Madness
I was one of the lucky ones, though. About six months later, it was revealed that Bre-X was a giant fraud. There was no gold. Investors had been swindled. Lots of money evaporated in an instant.
Lucky me, I had made out like a bandit. I thought I was infallible, even though it was really just dumb luck. I thought I had a knack for picking the right stocks and my profits from Goldstake were frittered away on other hot/stupid/questionable stocks.
Moral of the Story
Penny stocks are a risky investment and people should research the company before investing. Lots of company information and financial documents are readily available on the internet these days, so there is no excuse. If you don’t know where to start, you can use Google as a penny stock research tool.
Sometimes I wonder if the purpose of my life is only to serve as a warning to others.
Wishing you happy and profitable investing.