People think investing penny stocks is the easiest and shortest path to guaranteed riches. They are sure they are bound to stumble across the next Amazon or Apple which will skyrocket their tiny investment to a massive return. As most people thankfully know, if it seems too good to be true, “It is”. Penny stocks investing is certainly a good investment approach and with proper research one can hit the jackpot ever now and then. But investing blindly in penny stocks will leave you penniless in no time.
What are Penny Stocks?
Penny stocks a.k.a micro cap stocks are classified on their market capitalizations. These are stocks that are not listed on stock markets and have market capital of under $1bn. Companies with market capital of less than $50 million are known as nano caps. The Securities & Exchange Commission refer to penny stocks as stocks of five dollars or lees in value per share. The definitions vary but I just stick with the SECs view on stocks @ $5 or less are penny stocks.
The most important thing you should bare in mind is that investing penny stocks is much riskier than investing in publically trading companies on the stock market. It is much more difficult to do your back ground research. The companies are not obliged to publish critical account information and the sad thing is that a high percentage of these companies never take off financially. They either merge or close shop/
What Makes Investing In Penny Stocks Risky?
The main reasons it is risky (unless you know what you are doing) investing penny stocks is :
A: Companies listed in the pink sheets (Penny stocks) are not obliged to file with the SEC. Therefore it is much more difficult to find good information on these stocks. All good investors need to study well their investments. You are leaving a lot to chance with penny stock investing. Also these companies are not under as much pressure to perform for large share holders and don’t have to worry about being reported on investment news or television.
B: No set standards. Major companies listed on the stock exchanges like the NYSE need to be at a certain level to be allowed to keep being traded on these exchanges. IF they fail to meet this level they have move down exchange divisions which would have dramatic impacts on their market value. Penny stocks companies don’t have this minimum standard to keep aiming above.
C: Little or no historical records. How can you analyse a companies performance and growth if you have no information on its past?
D: No liquidity means that these stocks are not actively trading. This means it can be harder to buy or sell the instrument than on a constantly ticking security on the stock exchange. This also leaves penny stocks open to fraud. For example the stock can be bought just to hype it up and make it seem more liquid so that other investors find it attractive and jump on board. Those that did they hyping then sell off their over hyped stock for a nice profit.Leaving the unsuspecting investor (you) with an overvalued stock which will soon move down to its true market value.
Conclusion
While they may seem very attractive you must be sure that you are making informed decisions when buying penny stocks. By informaed decisions I do not mean believing some spam email or news letter which the advertisers paid the publisher to try and get investors to part with their mone. You need to get as much information you can about the companies history, directors, owners and their forecasts and projections. Investing penny stocks can be massively profitable if you take your time and invest after doing your due diligence in markets that are on upward trends.
