Getting Burned by Penny Stocks

Penny stocks are a popular way to make money. Many investors see them as a great way to make a large amount of money in a short amount of time. But many things that seem too good to be true usually are, and get-rich-quick ideas tend to be a risk with only a small possibility of huge gains. Penny stocks can be this way. While a few noteworthy investors have made substantial profits via penny stocks, many have lost fortunes. Quite often the best penny stocks to buy are not immediately apparent.

This is partially because of a lack of understanding among beginning investors about how penny stocks work, and a lack of regulations among penny stocks themselves. This means that penny stocks can be subject to wild swings in price, often without any correlation to the actual value of the corresponding company. Any stock that trades below $5 can be considered a penny stock, even though this designation is typically determined by market cap and not stock price.

Since penny stocks trade at such low volume, they are not required to file the same earnings reports as exchange listed stocks. Reading such reports for an exchange listed stock would tell investors if the company is losing money, and if the company is likely to be a wise investment. However, the lack of detail in a report from an over-the-counter or penny stock might not provide enough information to determine this.

Because of this lack of concrete data, the projected success of the company is often simply rumor or speculation, leading to wild swings in price. If handled well, this drastic volatility can be harnessed by savvy investor, but more commonly investors get burned.

Category: Investing in Penny Stocks