The Wolf of Wall Street – Are penny stocks really profitable?

By December 17, 2014 Trading 2 Comments
The Wolf of Wall Street – Are penny stocks really profitable?

Amidst the lavish lifestyle, beautiful women and drugs, the movie ‘The Wolf of Wall Street’ shows us the unadulterated truth about the financial world and at the same time gives us some useful life lessons about stock market.

Share market trader should know about penny stocks

Be it a handy tip given by stock broker Jordan Belford’s mentor about enticing the client to reinvest, keeping his profit notional, while they the stock brokers would take home cold hard cash or misusing Steve Madden’s IPO by utilizing rat holes to make illegal profit.

For those of us who haven’t watched the movie yet

The film revolves around the concept of penny stocks and the wide spread of commission that the stock broker enjoys in selling these stocks, which in Belfort’s own words are practically junk. The important question is that, is it possible to make quick money off pink sheets? We do know that ‘The Wolf of Wall Street’ is based on a true story. The real Jordan Belford did actually commit securities fraud and go to jail for his financial crimes, the storyline is not simply a fictional concept that made an interesting movie. Stock brokers point of view aside, as a trader here are a few facts you should know before you go ahead and invest in such stocks.

Also Read :10 Movies Every Trader Must Watch

Is all the fuss around penny stocks justified?

Penny stocks are a stellar example of one of the basic laws of finance, ‘Appetite for risk is directly proportional to rate of return’. Penny stocks have high volatility, it’s not impossible for you to get rich very quickly by investing in penny stocks. It is also equally or infact more probable for you to lose your investment entirely! One could equate a penny stock with a lottery ticket, pretty much everyone one can afford to buy one but chances of winning the jackpot are slim. Not such an appealing investment now, is it?

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What not to do while planning your investments

In stock market, the general mind-set of people who buy penny stocks is, they expect to find a diamond in the rough and someday the share value of their favourite penny stock will skyrocket giving them exponential profits. They rationalize their investment by thinking that all companies have to start somewhere, which is partially true. However, a lot of the companies that rule the stock market today, in fact, never traded as penny stocks. They managed to hit the stock market at a respectable price. Disadvantages such as lack of availability of information and transparency, make penny stocks attractive to scam artists. ‘The Wolf of Wall Street’ illustrates all of these facts throughout the course of movie and keeps it all very interesting by showing us the ugly underbelly of Wall Street and the constant pressure that traders and stock brokers are under.

Also Read : 10 Golden Rules for Investors

The key take-aways..

The movie demonstrates Jordan Belfort’s impeccable salesmanship and sense of branding while setting up his own firm, where he uses a hard-hitting name ‘Stratton Oakmond’ to build a sense of trust in his clients. Belford’s marketing expertise combined with his knowledge of finance, allowed him to make money quicker than he could spend it. All in all, ‘The Wolf of Wall Street’ is an entertaining movie with some financial tit-bits thrown in and is a must watch for those of us with a sense of humor.

With regard to penny stocks -Our advice is that if you have a sumo wrestler’s appetite for risk, you could consider investing in pink sheets. For the rest of us, it would probably be best to steer clear of them and consider stocks that have a more balanced risk-reward ratio.

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