Be Wary Of Penny Stocks
This warning goes out to newbie investors, and more times than
not, it falls on deaf ears. But I'll repeat it one more time
just for posterity's sake: if you're new to investing, be very
careful of making investments in penny stocks. You will
undoubtedly be very attracted by the potential returns due to
the deflated share prices, but keep in mind that things are
usually not what they seem to be, and sometimes penny stocks
really are "too good to be true.".
Why do pennies pose such a risk? In a word: reporting. Or more
accurately, lack of reporting. Since Over the Counter (OTC)
stocks are not listed on any exchange, they don't have to follow
the stringent reporting criteria which we've all become
accustomed to for major exchange traded stocks. What this means
is that these companies generally offer very little financial
guidance, and tend to rely much more on hype than exchange
traded stocks.
Penny stocks usually have very small floats (the amount of
shares actively traded) and for this reason, coupled with thin
capitalization, the stocks can be manipulated quite easily by
several buyers or sellers, and some news or rumors. Many penny
stock companies use spam email to promote their products. They
send out to large groups of internet users who end up becoming
interested in the stocks. As the emailed people start buying,
the price goes up, and the investment starts to look like a
great deal. At this point, the pump and dumpers will start
selling all the shares they can, and the investment will come
back down to Earth. The pump and dumpers make the money, and the
investors who come in later are left holding the bag.
These pump and dump schemes are extremely common, and penny
stocks are almost always what are used for the promotion.
Particularly vulnerable to this ruse are small and new investors
who have tiny amounts of capital. Most of these types of
investors want to accumulate a large amount of shares with the
hopes of turning a meager $200-$500 investment into a retirement
nest egg. Most end up losing their capital.
These warnings might seem obvious, but it's amazing how often
people lose their head when dealing stocks. Most people feel
that the number of shares is their best chance for making
profits. They feel if they can but 100,000 stocks for 0.001 that
somehow they'll get rich if only the stock hits 1 cent! This is
true, of course, but almost never happens. Most stocks that sell
for fractional pennies are more likely to stay in that
neigborhood rather than to rocket to even $10.
Remember that the only metric you need concern yourself with as
it relates to investing is total returns. The higher your
percentage return, the more money you have. You will never end
up concerning yourself with share price if you are a studious
investor. It's meaningless in the final analysis. For savvy
investors who do a ton of research, finding a bargain in the
penny stock heap is possible. Once you've done a few trades of
"normal stocks" give it a try, but lay off the pennies until you
have a very good understanding of what makes share price move.