Should You Buy Penny Stocks?
Should you buy penny stocks? That's an excellent question. Why don't we weigh some of the pros and cons?
In the United States, a penny stock is one that trades for less than $5 per share on any market. On the other hand, the term can also apply to any lower priced and easily manipulated stock. It will often refer to a stock sold outside NYSE, NASDAQ, and MEX, the three major stock exchanges.
Penny stocks, because they are priced so low, are a tempting way to get into the stock market. Another reason they're attractive is because they could dramatically increase in value in short order. The problem is that for the same reason, there's a big potential for high losses.
After you buy penny stocks, you may find yourself stuck with them. They can be hard to sell. Because these stocks don't have as many investors, they are usually not traded as often as the more popular and pricy stocks.
In addition, if the particular stocks you're looking at are listed on a lesser-known exchange, they may not be subject to the same listing requirements or minimum standards that other stocks are. That means they are more unstable, volatile.
Another thing: Penny stocks are a great source of income for fraudulent individuals. This is due to the stock's less known status. Many of these same people have misled investors through internet message boards and spam emails.
They get investors to pour huge amounts of money into a stock that has no real potential for growth, and then selling their own shares when the price rises. This scheme has a name: "Pump and Dump." It profits the fraudulent and results in big losses for the naive investor.
The cheap prices might make you inclined to buy penny stocks. But before you invest any kind of money, be aware of all the potential pitfalls. Do your research and know who you're dealing with!
Visit How to Buy Stocks and get all the free help you need in discovering How to Trade Stocks, How to Read Stocks and so much more!
Published December 5th, 2007
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