Don't Miss

Weighing The Pros And Cons Of Penny Stocks – What Are The Risks?

By on September 18, 2013

The hype around penny stocks can be hard to ignore. After all, who wouldn’t want to become a millionaire overnight? Sadly, it rarely works this way. Just like you can gain a lot of money with this investment method, you can also lose a lot. Penny stocks come with many risks and investors need to understand these risks before investing.

Difficult to Research

Anyone will tell you that in order to make a good investment, you need to research. Unfortunately, researching many penny stocks is almost impossible. There’s usually very little information available and even the information that is available may not be enough to go on. A good investment needs to be scrutinized so that you make an informed decision.

Weighing The Pros And Cons Of Penny Stocks - What Are The Risks?

Lack of Minimum Standards

Stocks traded through the major stock exchanges are required to file documents on a regular basis so that investors know what the company is worth at any given moment. Penny stocks are not held to the same standards. This means that you may find data that is outdated and makes the company appear better off than they really are. In other words, penny stocks can be a real shot in the dark.

No Background

Another way people make good investments is to look at the history of a company. For example, it’s easy to look at a company like Wal-Mart and understand that the company has staying power. Penny stocks either have a poor history or no history at all. It’s impossible to make an informed decision when you can determine how the stock has done in the past.

Inability to Sell

Penny stocks often lack liquidity. Liquidity is the assets a company has available. When there is a low level of liquidity, it can be almost impossible to find someone to purchase the stocks. If you do find someone, there’s an even better chance you’ll have to sell the stock for much less than it’s actually worth.

Manipulation

Last, but not least, the price of penny stocks are easy to manipulate. The most popular form of manipulation is referred to as pump and dump. This is when multiple people purchase a lot of stock in the company to create hype and demand. They then sell the stocks for much more than they purchased them for. Those that purchase the stocks see a quick decline in the price shortly after making their purchase.

Penny stocks may sound like a great investment, but they’re one of the biggest gambles when it comes to stock and even big investors like Timothy Sykes approach them with caution. Not being able to research a company or check the company’s history makes it impossible to make an informed decision. Spend your time and money investing in stocks that have a strong history and you feel confident in.

About Faye Sparks