I.P. Oh No …

In 2004, a friend told me about a broadband provider that was soon going to go public (via an initial public offering, or IPO) for $1 per share. I bought more than 1,000 shares. The stock tripled, and my friend advised me to sell. But I thought, "We have a rising stock market and surely the stock will go even higher."

Well, the stock plummeted to less than 10 cents per share, where it rested for almost a year. The company then changed its name, but its value remained the same.

Lesson learned: Don't buy stock for less than $5 per share.

— Mike W., via e-mail

The Fool Responds: First, you're right to avoid "penny stocks," as they can be easily manipulated and hyped. They can be very volatile and are often tied to companies without strong track records of growth and earnings.

Be wary of IPOs, too. It's hard for us little investors to get in early on the good ones, and in many cases, you can do better by waiting a year or two, until the stock settles down.

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