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Penny Stock Trading Facts and Risks

By Edited Nov 13, 2013 0 0

A lot of people nowadays would like to earn money quickly. This is one of the main reasons why a lot of people are getting scammed and often lose a great deal of money. It is sad to know that this "easy money" mindset has progressed to the stock market and has made many people unwisely invest on penny stocks that may oftentimes be too risky in the first place. Let us learn how these types of stocks can actually be problematic to investors.

What Are Penny Stocks?

Penny stocks are stocks that can be bought for less than a dollar or, in some cases, around less than five dollars per share. Most of these stocks have a short history of operation and only hold a few million dollars in net tangible assets. Generally, these have minimal liquidity, low market caps, and are frequently traded on over-the-counter deals.

Why Are Penny Stocks Risky?

You should be aware that it is riskier to trade these stocks as compared to regular stocks. After all, because these stocks face issues such as having no adequate backgrounds, they offer very limited information about the companies, therefore posing huge threats for scams.

Lack of Background

The chances are, if companies are amenable to trade stocks in very small amounts, they most likely have inadequate business history or worse, may have a very negative one. Either these companies are just starting out in the business or they may have recently experienced bankruptcy, therefore they resort to selling their stocks at very low prices.

Because there isn't much information available about penny stock companies, there is a very huge risk that you might be making a bad investment. And naturally, you may end up losing a lot more money than your expected gains.

Limited Information

Almost all companies offering penny stocks do not give substantial information that is really available for investors for online viewing or even elsewhere. After all, nearly all exchanges in this market operate on the Over The Counter Bulletin Board (OTCBB), which don't actually require exhaustive reports for public posting.

Without such useful information, it can be very difficult on the investor's part to arrive at the right and objective trade decisions, and this could oftentimes lead to unwise guesswork.

Bribes and Scams

Generally, such stocks are being promoted by persons who have being paid to do just that. Possibly, you have already received junk e-mails that may sound too good to be true, encouraging you to invest in a specific penny stock. Bear in mind that those successful companies today mostly did not begin with penny stocks.

The common scenario happening that enables bribes and frauds is that a company might buy some stock then spread emails to inform people that a certain stock is performing well in the market. Many readers may then react to this by investing in stocks, inducing the price to dramatically shoot up due to the principle of supply and demand. Later, the scammer could sell his or her share for a large amount before the price dramatically declines again leaving a lot of investors to lose a huge amount of money.

To conclude, although there is much potential for growth in very small sized stocks, greater risks are involved. And often, if you are not very familiar with the business scope as well as with the essential information on how your investment is performing, there is a huge probability for you to be scammed.

Therefore, if you are a novice in the whole stock exchange market industry, be sure that you choose wisely the type of stocks to invest in and do not pursue what may appear easy to make you rich. Bear in mind that, although penny stocks might be tempting, they can involve huge risks on your part.



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