Penny Stock Trading – Pros and Cons You should know

As you well know, a penny stock is an equity that sells for $5 per share or less and not many are listed on the NASDAQ or NYSE. This is due in part to the fact that most penny stock companies are too small to meet the SEC requirements for listing on the major markets. Normally, they are traded on electronic quotation systems known as the OTCBB or Pink Sheets. Consequently, these stocks are often hidden from investors and lack the exposure that traditional stocks receive in the investment mainstream. As a result, we usually see them traded over the internet through online brokers

What We know about Penny Stocks

Experienced individuals who visit Investors Hangout know that penny stocks are part of a broad ranging, multi-sided spectrum. On one end of this spectrum, we see 20-year-old millionaires, instant wealth, and massive profits. On the other end, there are companies teetering on bankruptcy, fraudulent activities, lost investments, and scams. It is in between these opposites where you will find the reality of penny stocks. It takes times, but you learn quickly to discern ways to make a profit.

Maybe you’ve heard the story about the widow whose husband left her a fortune when he passed away getting swindled out of all of it because she fell for a con artist’s sales pitch and was deceived into investing it in a bunch of worthless stocks. “Boiler Room”, “The Wolf of Wall Street”, and other similar movies do not depict that. In reality, it’s a matter of lying and stealing for personal gain.

Does trading penny stocks involve an elevated level of risk and the exposure to fraud and scam artists? YES! Does trading penny stocks mean that you’ll be investing in smaller companies who are just starting out or is it a matter of investors overlooking or undervaluing these companies? YES! Can you take a small investment and multiply it into huge gains? ABSOLUTELY! Just be aware that there are two sides to every story when you are dabbling in the world of penny stocks.

The Pros

Despite all the risks involved with penny stocks, the reality of realizing large returns from small investments can be very enticing, especially to the inexperienced investor. Here are 4 advantages to trading penny stocks:

The excitement factor – it’s easy to understand the excitement that can result from big gains over a shorter period of time, especially for those who’ve only seen a 5% or 6% gain over years’ time.

Faster returns on your investments – granted, not every penny stock is a fast mover. However, the ones that offer faster returns on one’s investment can make big price moves in a matter of days, not months or years.

Tomorrow’s potentially big winners – there are numerous companies whose stocks trade for less than $5 per share. They are characterized by:

• growing market share

• improving financial ratios

• products and services that could potentially dominate their industry

• proven management teams

• rock-solid financial positions

Turning the smallest investment into big profits – the average investor only has a small sum of money to invest. They could purchase hundreds or even thousands of shares with a $500 investment while that same amount might only purchase 4 or 5 shares of a larger corporation. You make the choices.

The Cons

Naturally there’s a downside to investing in penny stocks. Consider the following when investing in smaller companies:

At-risk markets – although it’s rare, there are some penny stocks that we see traded on the AMEX, the NASDAQ, and the NYSE. These markets subject companies to investor communication obligations, listing standards, and reporting requirements. On the other hand, penny stocks are typically traded on the OTCBB and the Pink Sheets where these factors are almost non-existent. Unfortunately, these exchanges attract some extremely low caliber companies.

Beware of the rumor mill – as with any other industry, the rumor mill can generate some shocking variations with penny stocks that have garnered investor attention. It doesn’t take many purchases of a single stock to push its share price higher and create a stampede of investors. Bitcoin was a perfect example of this.

Different broker regulations – many stockbrokers won’t allow penny stock trades but those who do have much higher commissions. You’ll find that many brokers won’t accept stop-losses and other trade orders.

Higher volatility – rapid, dramatic price movements are great if it’s an upward trend. But just remember that the volatility coin has two sides.

Lies, pump-and-dump schemes, and scams – penny stocks are the perfect tool for the scam artist because of their lower price per share and their thinly traded nature. The scamming promoter will use blatant lies or grossly misleading statements in order to con people out of their money.

Losses far outweigh the gains – it’s no secret that most penny stock investors lose money. While the gains are far outnumbered by the losses, the majority of those who dabble in the penny stock markets are going to lose money.

Low-quality companies – some companies are a financial train wreck and on the verge of filing bankruptcy while others are so new that it’s difficult to find any credible information about them. In many instances, they are racking up huge losses or they sell products in an industry filled with more successful competitors.

Thinly traded – penny stocks are subject to thin trading unlike some larger companies that see millions of shares traded in a single day. An average of a few thousand shares being traded each day is not uncommon. On the other hand, some companies see lower trading volume.

If you would like to discuss penny stock trading with experienced and knowledgeable investors, visit Investors Hangout, the site that offers FREE discussion forums and stock message boards for the beginner or the expert. For more information, please visit our website today and get a quick update on the latest on the penny stocks.