Two Reasons to Avoid Penny Stocks
Penny stocks, to the uninitiated, might seem like an awesome way to make money quickly. After all, they are cheap, and have the potential for astronomical growth. Also, it is true that many people really have made a huge amount of money buying and selling penny stocks. However, just because someone makes money buying and selling penny stocks does not mean that it is likely for the average or even above-average investor. In fact, one of the reasons that a select few have made a killing in penny stocks is that many others have been burned.
There are two main reasons to avoid penny stocks.
The first is that penny stocks are hard to research. Penny stocks enjoy a privileged position as nearly inscrutable, and this is primarily because of their average trading values. Most stocks that routinely trade below $5 per share are considered penny stocks, and are subject to fewer of the same regulations as higher priced stocks. Penny stocks are often not required to file reports with the SEC, which means that earnings, sales, and other important information is often hearsay. Because it is difficult to research the stock properly, it becomes nearly impossible to determine if it is a good penny stock to buy.
Another reason to avoid penny stocks is that they are hard to liquidate. While a small price means a correspondingly small ability to do adequate research, penny stocks also typically have a small market cap. This simply means that the total number of stocks is small. Because there are not many stocks, there are not many people investing, meaning that it can be difficult to find a buyer when you want to sell. Because penny stocks tend to experience such large swings in price, this can be important.
Category: Penny Stock Tips
