Penny stocks are common shares of public companies that trade for less than $1 per share. Because of this low share price, it?s possible to invest in penny stocks even if you don?t have a lot of capital. This makes them an appealing investment for many ? and especially so for new investors.
Penny stocks can offer the promise of reaping a significant payout from a modest investment. For example, if you buy 1,000 shares of a penny stock trading at 25 cents per share, your initial investment would be just $250. If that company?s share price rises to $20, your shares would be worth $20,000. Your profit would be $19,750.
Sounds enticing, right? In fact, lots of folks who are just getting started in investing are attracted to the low cost and the promise of easy money. Hit just one hot stock and you may be rich!
Kind of like feeding money into a slot machine: Low initial investment and a high potential reward.
But wait a minute. Ask yourself this question: Do casinos lose money on slot machines?
Of course not.
And some analysts say penny stocks are no better than gambling. Here?s why:
Penny stocks trade on a market exchange that is mostly unregulated by the U.S. Securities and Exchange Commission. In fact, many represent shell companies whose value goes up and down rapidly because of the individuals trading them. They can be up 200 percent one day and down 80 percent the next, though nothing of significance occurred in the company.
Typically, penny stocks have low daily volume. This means you could buy and own shares, but in some cases, you may have no one to sell them to. That means poor liquidity for the investor: You may get stuck with a stock you cannot unload.
Penny stocks differ from most stocks in that they have little or no following by analysts. You will rarely see a stock analyst, wire house or investment bank initiate coverage on a penny stock. Unfortunately, most of the penny stock information on blogs and websites is from individuals whose opinions are based on manipulation by touting a particular stock. So analysis and skill are sometimes eliminated from the equation ? just like with a slot machine.
And because they have such a low share price and few outstanding shares, penny stock prices can be manipulated by people who place large buy or sell orders. One scam is called a ?pump and dump.? Scammers buy many shares of a penny stock at a low price and then pump up the price by sending emails and advertisements to unsuspecting investors about this ?hot stock.? The victims buy into the hype, purchasing the shares and driving up the price further. The scam artists then sell their shares for a big profit, leaving the victims with large losses as the stock price heads south.
With penny stocks, you risk failure most of the time. Most of us are much better off investing in regulated companies with a proven track record.
Tags: INVESTING, penny stocks, pump and dump
Source: http://wealthmagazine.com/2011/09/beware-the-pitfalls-of-investing-in-penny-stocks/
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