Many people are lured into the whole penny stocks trading idea because they want quick profits. The idea of earning money quickly and easily makes them fall for this scammy method of investing that in most cases causes them to lose their hard earned money. Ideally, when investing in stocks, you want stocks from reliable and established companies. However, these stocks are often expensive. So, investors who don’t have much to invest, spend their money on penny stocks and lose whatever they do have.
So what are penny stocks?
Like their name suggests, penny stocks are sold at prices below a dollar. This is because they’ve only been on the market a short while and the companies that listed their stocks only have tangible assets worth a few million dollars.
Minimal liquidity and low market caps are trademarks of penny stocks. These are just some of the reason why they are such risky investments.
You will usually not be able to find much background information about the companies that are offering penny stocks. This is very different from established companies where you will have access to quarterly or yearly financial reports. The lack of information is very disturbing because you’ll not know for sure if the company has any potential. You’re literally gambling and hoping for the best. There are many cases of scams involving penny stocks.
While there are a few people who do make good money with it, they are few and far between. If you look at the big picture, the majority of penny stock investors only see losses over a period of time. The house always wins here too.
Many people wonder why the prices of penny stocks are so low. There are several reasons for this. The company may just be starting out or may have become bankrupt and are selling their stocks at ridiculously low prices as a last effort to recoup their losses.
Usually, when a company is new and hasn’t been in business long, it has no choice but to trade its stocks at low prices to attract investors. Many gullible people get attracted by the low prices and think that penny stocks are the best stocks to buy… when the reverse is true. To make matters worse, people are often hired to promote penny stocks and make them look like the next best thing after Google’s stock. Lots of methods such as spam emails, soliciting, ‘seminars’, etc. are used to talk about how profitable penny stocks are.
Common sense will indicate that the wealthy investors rarely touch penny stocks. So why are many people who don’t have much money to invest considering it? They buy into the dream of easy riches. If you do not have enough money to buy stocks from a reputable company, you will want to wait and save till you have a decent sum to invest in a company that has a much higher chance of rewarding your investment. Don’t put your faith in cheap stocks and expect to become a millionaire overnight. Even the successful companies rarely started off through penny stocks. Forewarned is forearmed and now that you know about penny stocks, do stay clear of them.
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