Is it Wise to Buy Penny Stocks?
Have you wondered if you should buy penny stocks? It's a good question. Why don't we weigh some of the pros and cons?
A penny stock in the United States is a stock in any market that you can trade for less than $5 per share. On the other hand, the term can also apply to any lower priced and easily manipulated stock. It will often refer to a stock sold outside NYSE, NASDAQ, and MEX, the three major stock exchanges.
It's very tempting to get into the stock market by buying penny stocks, seeing as how they're so cheap. Their low prices mean they have the potential for increases of several hundred percent over a few days. But they also have a huge potential for steep losses for the same exact reason.
After you buy penny stocks, you may find yourself stuck with them. They can be hard to sell. These stocks have fewer investors interested in them, so they are not traded as often as higher-priced, popular stocks.
In addition, if the particular stocks you're looking at are listed on a lesser-known exchange, they may not be subject to the same listing requirements or minimum standards that other stocks are. That means they are more unstable, volatile.
Another thing: Penny stocks are a great source of income for fraudulent individuals. This is due to the stock's less known status. Through spam emails and internet message boards, many people easily mislead potential investors.
What they do is they encourage investors to dump huge amounts of cash into a stock that has no growth potential, then bailing out and selling their own shares as soon as the prices rise. "Pump and Dump" is the name of this infamous scheme. It has emptied the pockets of many a naive investor and lined the wallets of the fraudulent.
The cheap prices might make you inclined to buy penny stocks. But before you invest any kind of money, be aware of all the potential pitfalls. Do your research and know who you're dealing with!
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Published December 5th, 2007
Filed in Management, Marketing