Online Stock Market Trading - Penny Stock Trading Risks
People want to make profits on their money rapidly. This has lead to unscrupulous scammers taking advantage of this desire. People have often lost a substantial amount of money to scams.
This attitude has infiltrated the stock market as well. Investors are placing their money on penny stocks, which may not be the wisest investments due to the high risks involved.
This article explains the dangers associated with penny stocks.
Penny Stocks Explained
Penny stocks are stocks in companies that have minimal net physical assets of less than a few million dollars. These companies tend to have a brief operations record. Stocks in this category are often sold for under one dollar or five dollars, as the case may be. Penny stocks are customarily traded on over-the-counter exchanges, have meager market caps and low convertibility.
Penny Stocks Risks
Trading in penny stocks is much more hazardous than trading regular stocks. There are serious concerns about absence of background knowledge, scanty information available and scam potential surrounding penny stocks.
Absence of Background Information
Companies that are involved in offering shares through penny stocks are most likely those with a poor business track record or a minimal history. Other reasons that a company would offer penny stocks is because it is just beginning business operations or has gone through bankruptcy.
Taking these concerns into consideration, there is an extremely large potential for bad investments. Such a bad investment could cause an investor to lose significant sums of money.
Scanty Information
Investors do not have access to readily available information on companies that offer penny stocks. Penny stock exchanges function through the Over The Counter Bulletin Board. This Board does not have regulations requiring public posting of complete reports about these companies.
The lack of information makes it almost impossible for an investor to make informed trade choices and leaves the investor in a precarious position.
Scam Potential
A common scam circulating though spam emails is where a company buys some stock and then informs the email recipients that the stock is performing well. The recipients might then invest in the recommended stocks thinking they are acting on valuable piece of information. Heavy demand for a stock will cause the price to rise substantially. After the price inflates, the scammer sells their stock for a considerable profit before the price deflates. The rest of the investors are left holding stock that is next to worthless at a heavy loss.
If you receive an email such as this, remember that penny stocks are not usually sold by people employed for that purpose. Another point to remember is that profitable companies with proven operating histories generally did not begin by offering penny stocks.
The amount of profit to be made through penny stocks is not justified by the risks they carry. Lack of information regarding the companies offering penny stocks increases the potential for scams.
Penny stocks may sound appealing to novice investors. However, it is best to educate yourself about regular stocks rather than chance your investment on a "get rich quick" scheme.
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