The Dangers of Penny Stocks
Penny stocks or micro-cap stocks are generally classified as any stock which sales for below $5 a share. This means that investors can buy a large amount of ownership in such a company for far less that an established large growth company. Penny stocks are extremely popular among day traders. The strategy often implemented it buying shares in very small company, waiting for the price to move up a few cents then selling. Repeat hundreds of times.
Although this strategy can be very profitable because even a movement of a few cents can mean a large percentage increase in your holdings value, it a very volatile way to trade. If fact, with the growing problems in penny stock fraud, some believe that this is the most dangerous investment one could make. Some of the major dangers of penny stocks are as follows:
No Background
Companies trading for such small amounts will almost always little history or a very negative past. These companies are often brand new or bankruptcy is looming. With adequate information about penny stock companies there can be no way to ensure your investment is a wise one.
Different Requirements
Stocks listed with the OTCBB and Pink Sheets do not have to maintain the same standards as other more known and publicly traded companies.
The reason the OTCBB exists is partly for companies that cannot maintain status on a larger exchange (ex. NYSE). The OTCBB does make its companies to give timely documentation with the SEC, but the Pink Sheets has no such requirement. The standards imposed by larger and more reputable exchanges are there to protect investor, use them.
Bribed Recommendations
Many penny stocks are promoted by people who have been paid to do so. You may have gotten the spam emails that promote the ‘Next Microsoft!’ Well the truth is that Microsoft was never a penny stock, it started out being traded to values equal to about $25 in today’s terms. Don’t be fooled by high pressure phone call either, and please do your own outside research on all your investments.
Overall, while the potential for outrageous growth is possible, there is a reason the companies are being traded for so little. The best advice is to look for companies that provide a strong service or product. Those companies, while costing more, usually provide great results without all the stress of the penny stocks.
I think that most penny stocks are scams. When trading penny stocks, it’s important to realize that most are worthless. It doesn’t mean you cannot make money.
You have to go into them realizing they are not investments and you have to sell when you realize the profit you want, because if you don’t, you will be left with nothing.
I normally visit this Penny Stocks Site: http://www.surefirepennystocks.com to research. It’s a decent resource.
I know that in penny stocks, they move with good news, chatter online, and when price and volume breakout occurs, you hop in. When the momentum slows down - GET OUT! Take your profits and limit your losses, that’s the way to make money with them.