The Truth About Penny Stocks – A Must Read!March 3 | Posted by Matthew Clark | Financial Planning 101, Inside Trader Highlights
Playing the stock market is risky business. Investments can range anywhere from high-risk stocks to low risk mutual funds and everything in between. When it comes to high-risk investment options, penny stocks often top the charts as some of the highest risk investments you will ever find. Of course, they also offer some of the highest yields of any other stocks due to the fact that the prices start so low that the upside potential greatly outweighs the financial risk involved. Do not get stars in your eyes however when considering penny stocks as investments. There is a great deal of risk involved in investing in penny stocks, and unless you absolutely know what you’re getting yourself into, you may end up finding yourself in a very uncomfortable position.
Some of the common risks associated with penny stocks may not be risks one would assume are related to the stock market. The thing you need to remember is that trading penny stocks isn’t regulated in the same manner that the major stock exchanges are regulated. This means that a large safety net that other investors in the stock market are protected by, to some degree, does not extend into the murky waters of penny stock trading. It is the forgotten child of oversight and investors are often left to fend for themselves.
The first risk you need to consider when deciding whether or not penny stock investments are for you is fraud. This type of risk seems to be quite rampant in the penny stock market. You will find all kinds of fraudulent penny stocks that are heavily marketed by overseas companies that look glossy and legitimate on the Internet, in investment magazines and brochures, and even in carefully crafted and well written press releases, newsletters, and emails. The problem is that there is simply no product, or the demand is deceptively overrated and the stocks are essentially junk stocks worth nothing, if they exist at all. The “businesses” in question take the money, dump the stock, and run never to be heard from again. Unfortunately this is quite common and many of the “companies” that perpetrate the frauds are located overseas. This is the biggest risk that you must consider when investing in penny stocks though certainly not the only risk.
Another risk is that most penny stock companies that are listed are often smaller businesses that are still developing or are larger businesses that have fallen off the major exchanges radar for one reason or another. They may be going through a desperate restructuring or may be failing all together. Both pose serious risks. However, if you choose to put your faith in the “right” new business or an old business that is finally getting its act together, you may find yourself standing in front of an excellent opportunity full of potentially amazing profits waiting for you on the other end of the roller coaster ride.
Other risks that are involved when trading penny stocks are the lack of financial reporting. Corporations and companies that trade in the major stock exchanges are required to release their financial information and account to their stockholders. Unfortunately the same doesn’t hold true for penny stocks. There is no accountability and very little public information. This means you have to really dig to find credible information about the companies you are considering, and are left going with your gut feeling rather than relying on legitimate information that will be beneficial in your investment decisions.
Penny stocks are very lucrative to those who manage to pull off the investments and come out ahead. But quite often it can be hard to make a decent profit let alone a huge profit with these types of investments.