I Want To Start Investing In Stocks, But I’m Afraid Of Losing Money. Would Penny Stocks Be The Best Place To Start?

Below is a question I answered on Quora that I wanted to share with everyone.

I Want To Start Investing In Stocks, But I’m Afraid Of Losing Money. Would Penny Stocks Be The Best Place To Start?

Penny stocks – also known as small, micro, and nano caps – is the worst place a new investor can start. Especially if you’re afraid of losing money.

Yes, investing in smaller companies can make you more money over time if you know what you’re doing. But if you don’t know what you’re doing the likelihood of losing money is almost 100%.

Why?

Because smaller companies are small for a reason.

Most of the time they’re newer companies. Companies in niche industries. Companies that don’t have competitive advantages. And many are even unprofitable and terrible businesses.

And I say this as a micro cap loving investor.

I know this because after I gained confidence as an analyst and investor I now concentrate almost exclusively on smaller companies.

After going through several thousand companies I analyzed my data and found I invested in fewer than 0.2% of the companies I came across. Or fewer than 1 out of every 500 companies I research.

This was more than two years ago…

As I’ve continued to improve as an analyst and investor. And continued to improve my investment processes and checklists this number’s gotten lower.

I haven’t analyzed my data since then but I would guess that I now invest in fewer than 1 out of every 1,000 companies I research.

Why so few?

Because of my ultra strict criteria I require before I will even consider investing in a company. I’m an ultra conservative value investor who requires safety from losing money as my number one criteria.

Another reason is a combination of the things I mentioned above… Most small companies are newer businesses. Many of which are terrible companies that shouldn’t be public.

If you don’t know how to spot these things you shouldn’t invest in smaller companies. Are even bigger companies for that matter.

If you’re a new investor and analyst start evaluating and investing in bigger companies first. As you learn, gain knowledge, and improve your processes and analysis you should start dipping into some of the smaller companies. But again, only if you know what you’re doing. And are confident in your abilities.

Did I miss anything in my answer to this new investor?  Let me know in the comments below.

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