Should I Invest In Penny Stocks?

If you are new to investing, then you will no doubt eventually hear about penny stocks. What are penny stocks? Simply put, penny stocks are shares in publicly traded companies that exchange for less than five dollars. Some even trade for fractions of a cent. Up until fairly recently, information about penny stocks was limited, and few investors knew how to navigate the world of penny stocks successfully. However, trading penny stocks is now a growing trend, and more investors are learning as much as they can in order to take advantage of what can be a very lucrative trading option. Should you invest in penny stocks? Here are some things you should first consider:

Volatility

The penny stock market is highly volatile, namely because it takes so little money to invest. Penny stock values change rapidly, meaning your twenty-five cent shares can go up to twenty dollars in a matter of minutes, or they can take a nosedive just as fast. If you are going to invest in penny stocks, you must be prepared to watch the market like a hawk, and respond at light speed.

Scams

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One very common scam perpetrated with penny stocks is for a person (or group of people) to purchase hundreds of thousands (or sometimes even millions) of shares of a floundering company, creating the illusion of high demand and value in that company’s stock. This pushes the price of the stock up. The shareholders then use websites, email blasts, newsletters, and telemarketing to spread the word about this “hot” new penny stock in order to create public interest. Those who buy these stocks are actually investing in a subpar company, and will have a very hard time liquidating the investment once the stocks inevitably begin to plummet.

Hedging the Risk

There are simple things you can do to avoid falling prey to penny stock scams. First off, never buy penny stocks through a free newsletter or promotional website, or in response to a tip you get from an unsolicited email or telephone call. Choose a reputable service to provide your penny stock picks. You can tell a service is legitimate a few ways: they have a working telephone number with a real human at the other end, they offer a free trial period, and they’ve had some media coverage.

Those who engage in the penny stock market are able to leverage a very small investment into a very large return, and that is the attraction. However, along with that potential comes a great risk. Therefore, if you are going to invest in penny stocks, make sure you keep these things in mind.

Byline: Irvin Quam loves writing about investments, stocks, and hot technology penny stocks. He loves watching fluctuations in the market and hopes to one day become a major investment broker.