Penny stocks tempt highly speculative traders with the promise of exponential growth. It’s important to research the company in question, including financial data and SEC filings.
Traders must also rely on multiple sources of information to avoid falling prey to pump-and-dump schemes. Otherwise, they may find themselves watching penny stock prices like a hawk for very little return.
Liquidity
Penny stocks are often illiquid, and it can be difficult to sell your shares without impacting the price. This makes them risky investments. It’s important to understand your investment goals and your risk tolerance before you begin trading penny stocks. You should only invest money that you’re willing to lose and make sure it fits into a diversified portfolio.
Pennies are a good way for small businesses to access funding from the public, but they don’t have the same potential for large gains as blue chip stocks. They also are more volatile, so they require extra research before investing. You should always use credible sources for stock promotion news and check financial statements to find out more about a company.
It’s possible to see some decent profits with penny stocks, but most people end up losing a lot of money on them. Unless you’re very knowledgeable about the business, it’s best to avoid them altogether.
Low Float
If you’re considering trading penny stocks, it’s best to use a trading platform that does not charge special fees or have volume restrictions. This will help you trade quickly and minimize your risk of pump-and-dump schemes. It’s also important to avoid stocks listed on the OTC markets or pink sheets, as these are often the targets of fraud and manipulation.
Penny stocks have a low float, which means only a small percentage of the company’s total shares are available for public trade. This is because they are frequently closely held by insiders or investors.
This can create a great deal of volatility, especially when the market reacts to good or bad news. This is what draws speculators and even gamblers to these stocks, as they can see tremendous reward with a minimal investment. But remember, penny stocks are short-term investments and should only be traded with money you can afford to lose. It’s recommended to limit your exposure to these stocks to no more than 10% of your overall portfolio.
Speculation
Penny stocks are typically of smaller, speculative companies that may not be well established. They also tend to trade over the counter rather than on formal exchanges and don’t have to file the same financial information as larger, more reputable stocks. This makes them vulnerable to speculation and rumors that can lead to big price swings in either direction. It’s important to do your homework and understand how these stocks work before purchasing.
Many penny stock traders become caught up in fallacies like the low-price fallacy, believing that lower priced securities are inherently cheaper than higher priced ones. Additionally, these stocks often receive little coverage from the media or from investment analysts and can be prone to illegal “pump-and-dump” schemes where unscrupulous investors buy up large quantities of the shares and then artificially inflate their prices with false positive statements. As with any speculative investment, it’s best to only invest with money you can afford to lose and make sure it fits into your overall portfolio plan.
Scams
The thinly traded nature of penny stocks makes them vulnerable to scams. Many are illegally promoted by dishonest brokers and promoters who generate sales with false press releases, fake mergers and bogus advance fees, among other tricks. These stock promoters often use flattering newsletter articles that look similar to legitimate research reports.
Pump and dump schemes are the most common scams in penny stocks. These firms issue shares and then sell them to raise money. The proceeds are not used to grow the company; instead, the promoters pocket the money.
To avoid falling prey to these scams, educate yourself about the companies you invest in. Research the history and background of the business, management and financials. Also watch out for fraudulent trade confirmations or new account cards that are mismarked. These scammers often mark them as unsolicited to avoid registration and disclosure laws. Also be wary of any broker who does not push you to buy immediately.
