Why Penny Stocks Are Volatile

Because of their affordability and potential profitability, Investors Hangout hears many success stories about penny stocks. Millions of investors reap big rewards with small investments. The downside is that penny stocks can be extremely volatile and result in big losses. As with any type of stock, there’s an inherent risk involved when choosing any stock for your investment portfolio and you need to be aware of it. The following will give you a better idea and why you should be careful when entering the penny stock investment arena.

Credibility of company management – although you’re not going to find an Elon Musk or Richard Branson managing a penny stock company, you still have to research their management’s track record. According to Investors Hangout members they feel that it’s important to know if a company’s management team has had any notable failures or successes and any legal or regulatory issues.

Fewer stringent regulations and requirements – unlike the NASDAQ and the NYSE, penny stocks are usually traded in the Pink Sheets or the over-the-counter bulletin boards (OTCBB’s). Consequently, there are far less regulations and requirements when it comes to assets, financial transparency, and governance.

Lack of company history or information – newer penny stock companies have little if any history or performance track records. This lack of information can make investing in a company far too risky. Without this information you won’t know whether the company is about to file bankruptcy or is highly overleveraged.

People are afraid of losing their money – although many investors have realized healthy returns on their investments, Investors Hangout has seen others shy away from penny stocks. Many individuals have a real fear of losing money and realize that any type of stock investment carries a certain level of risk.

There’s a potential for quicker returns – there is a potential for gaining large returns in a short period of time when you invest in penny stocks. Some investors who visit our forums claim to have gained returns of 10% to 1000%, while others have lost or tied up much needed capital for longer periods of time.

You can over-invest – in other words, you can invest too much. Since they are more volatile than traditional stocks, penny stocks look very enticing to many beginning investors here at Investors Hangout. You can learn how to trade stocks on a larger scale without losing too much money.

What to look for before Investing In Penny Stocks

If you are just starting out in the penny stock investment arena, you’ll have better luck by looking for the following characteristics:

• accelerated earnings growth

• already profitable or approaching profitability

• high entry barriers into their industry

• in a growth industry or relatively new market

• intellectual property, patents, and technology separate them from similar companies

• little or no debt load

• strong management team

• superior branding, marketing, and positioning over the competition

• track record of gains

Although this may seem a bit challenging, you can find penny stock companies that meet all of the criteria listed above. It is important that you research well before you invest your hard earned money.

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