The Basic Risks of Buying Penny Stocks
A coin has two different sides, similar to a penny stock investment. The purchases of penny stocks are not much different. However, you will realize that the penny stock spectrum ranges from massive profits, instant wealth, and young millionaires to bankrupt companies, illegal activities, lost investments and scams. Moreover, the reality lays between these spectrums ranges risks.
The main question is whether penny stocks are terrible investments, risky, full of scam artists owning fancy cars and obliterated investments. You have to understand the risks before you purchase any penny stocks if you want to be among the successful penny stock traders. However, it’s better for you to know that most penny stocks are organizations that have a low market capitalization and therefore highly volatile. So, when you decide to pick hot penny stocks, it could be the most speculative investment as an investor could make.
Penny stock investments can be said to be a fine line between gambling and investing, and most traders cross that line. However, it doesn’t mean that it’s all penny stocks that are bad, but know they are a significant risk to take.
Overview of Penny Stocks
Penny stocks are small-cap and low-priced stocks. Contrary to their name, they rarely cost even a penny. Most of the penny stocks are considered to be pricing less than $5 each. However, they can also trade in big exchanges such as NASDAQ or NYSE, but some investors will not know about a penny stock. The gains and losses are pretty impressive currently in the penny stock world, and you will not find them elsewhere.
You might not hear about all of the penny stock drama in the stock exchange every day, but they are there. It’s unfortunate that they have even gained a bad reputation including corruption and scams. Besides, you can find that a penny stock can become your wildest ride as an investor.
In the stock market, you will find many organizations out there waiting to sell their hot penny stock. However, you need to understand the risks associated with penny stocks before you purchase:
Advantages of Penny Stocks
1. Tomorrow's Big Winners and Incubating The Growing Firms
Most people become excited because of penny stocks as people view them as great investments to the upcoming organizations. It is true, but a private equity investment can quickly get most of the promising companies even at startup phase before they could trade publicly. However, penny stocks could, therefore, be a venue for the shares as they go down and can also include some companies that are already in the list from most main exchanges.
In the stock market, you will find various excellent companies that trade for pennies. Moreover, most of them have proven in their management, growing market share, rock-solid financial positions, improving the financial ratios and disrupting products and services set in dominating the industry.
2. Rare of Get-Rich-Quick Stories
One phrase you will hear often is “I made $100,000 in a month” trading a penny stock and it can be true. However, they are a small minority of traders that experience this trading penny stocks. Avoid getting influenced by the hype.
Besides, if you want to get a good penny stock, you need to do your research, therefore, getting one that can represent a promising investment of your money but be in a fundamentally sound business. However, when a person approaches you giving you the idea of purchasing penny stocks so that you can get-rich-quick, it’s not an opportunity for you and the warning bells should start sounding.
If you make 5% from your investment in a year, you can, therefore, understand the enthusiasm behind the significant gains among the penny stocks. However, you will can lose a lot, but you can also make lots of profit.
4. Ability to Turn from Small Into Bigger Investments
You will find that most of penny stock investors use a small amount when they are starting to trade. However, most of them decide to risk their money and end up gaining a lot. For example, when you have $500 for trading, you can only purchase few shares in a prominent trading company, but the money is enough to buy thousands if not millions of shares in penny stocks.
Even though it’s not all penny stocks that you expect to move quickly in their price ,but when they do, expect them to make a big price move in a few days and not years. It’s, therefore, an advantage of risking in penny stocks.
Disadvantages of penny stocks
1. Poor Quality Organizations
Sometimes, most of these penny stocks are low-quality companies to risk with your investments. In most cases, you find that their financial position has become a train wreck, their operations are resulting in massive losses, or they have a frightening balance sheet. Moreover, you might find that they have a questionable product in the market and has numerous competitors or the industry is dying.
2. Manipulating Prices
If there is something easy to manage is the price of the penny stocks because of their giving below average shares volume that they trade in a day and also low prices. It is the main reason why penny stocks become prime candidates for the pump and dump kind of scheme.
You find that there are often stock message board posters as well as newsletters, emails, etc. promoting these penny stocks so that they can attract some investors capital. After the stocks jump in price, you find the pumper selling out all shares and leave the other investors to be on their own.
3. Risky Markets
You will see that some penny stocks are trading on the NASDAQ and NYSE and it means that these companies have underlying reporting requirements, listing standards, and the investors communication obligations.
Unfortunately, the majority of these penny stock traders sell on the pink sheets, OTCQX, and OTC where there is no existence of listing charges, requirements or reporting regulations. In the low caliber marketplaces, they only attract the low-quality organizations by thousands.
4. Lack of Regulated Exchanges
You will find that these penny stocks are trading over the counter and therefore lack regulations. Besides, they lack enforcement in meeting any compliance rule. It could, thus, become an unseen risk for any investor who plans to purchase penny stocks for an extended time because the securities have not been exposed to various scams and manipulations.
It can be an unfortunate truth, but most of the penny stock investors trying to “take a crack” end up walking with less money than invested in the first place.
5. Lacking Financial Statements
If you hear that an individual company is selling hot penny stocks, you will need to visit the company and view its financial report as a wise investor. However, it will be essential if you can understand the income statements and balance sheet as a fundamental investor.
On the other hand, some penny stocks lack financials that you can observe and therefore no hard date you can analyze beyond what they offer by the other investors.
However, it’s not like other stocks, but all penny stocks lack liquidity. Various companies can only see $10,000 to $50,000 in trading volume in a day. It leads to competitive prices that are costly for large investors who are selling difficult positions. So, they are not like big companies having the ability to trade tens of millions every day from their shares and therefore thinly traded. However, you can get rapid and significant gain when the price moves in your favor.
6. Losing Money
There are many different ways you might end up losing your money because most things have to do with the penny stock trading process. Some brokers earn higher commission rates trading penny stocks. So, most of them will not agree to special trading orders like stop-losses.
On the other hand, these thinly trading and low-priced penny stocks have become a perfect tool to trick the investors and steal their money. Due to the worst pump and dump scamming methods, the promoter will load the shares up at low prices as they tell investors misleading statements at blatant lies. They always have a glossy mail-out that looks legit, have a fancy website and show you a sensible story. Besides, they will continue to sell to the victims as they keep pushing the price much higher while they are literally selling to you.
In conclusion, penny stocks are among the investment type that is attractive to those investors looking for a get-rich-quickly scheme and therefore will not mind taking a huge risk. However, it might be suitable to purchase the penny stocks; but on the other hand, it’s a terrible decision because you can lose your money as fast as it comes. It’s therefore essential to note that penny stocks are therefore inherently risky, fodder for some scammers and also make many gains. Even though there are risks and drawbacks associated with investing in penny stocks, some investors find it as a potential windfall and worth funding. On the other hand penny stocks can deliver impressive returns sometimes well over 1000% gains in just a few days.