What are Penny Stocks

June 3, 2008 · Posted in Stock Market 

Penny stock is a low-priced stock, normally valued bellow $5, that is mostly traded over the counter through special quotation services. Information of penny stocks is often hard to draw together and can also be easily manipulated, reason explaining why many investors often stay away from these assets.

Advantages of investing in penny stocks

Penny stocks offer some advantages or perks, although most of the time the end reward doesn’t compensate the risk. Firstly, investors don’t need a lot of money to buy stocks since most only costs a few cents. Contrary to what happens with other normal financial assets, penny stocks can shoot up considerably in value, sometimes several hundred percent, during a very short period of time, reason explaining why some inexperienced investors might be tempted to purchase these stocks.

Common problems associated with Penny stocks

As a potential investor, the first thing you should know is that penny stocks are extremely dicey assets and new investors should be conscious of the risks involving these investments. The most noticeable problem is that penny stocks tend to fluctuate extensively in price and can lose their listing during an exchange, which most often means the company is either in a severe financial state or about to file bankruptcy.

Limited liquidity is yet another problem haunting penny stocks seeing as most shares are bought over the counter and consequently, owned by fewer shareholders. The outcome is stock that isn’t traded very frequently, which in return permits sudden changes in sentiment to severely influence prices and increase volatility.

Fraud is a potential problem largely associated with penny stocks and one that should be taken very seriously, especially by those that aren’t accustomed to investing in these assets. The most common deceitful scam promoted by some scrupulous fraudsters is what is commonly known as a pump and dump scheme. The way these scams work is quite simple. A company will create a site on the internet with the intention of advertising exaggerated market gains, unrealistic profit margins or skeptical new investments, specially crafted to deceive possible investors. Then, false spam emails are sent with the aim of enticing unsuspecting investors to buy their stocks quickly before shares rise in value, creating high demand and pumping up the price. When prices are at a peek the fraudsters sell their stocks resulting in a sharp plunge in share prices and loss of money to investors.


Comments are closed.