Although the temptation to invest in some low priced stocks is hard to resist, as an investor you should be aware that getting involved in penny stocks can be EXTREMELY risky.
Definition First, let's define what these stocks are.
Penny stocks (as the name implies) are stocks that are priced in the $1 (and below) price range.
Now here are some things that you need to be worried about if you are thinking about getting involved in stocks like these.
This is a good time to point out that one of the biggest reasons why investors lose money..
..
is greed.
It is greed that causes an investor to jump on a stock simply because it is priced low with the "dreams and hopes" that this stock will suddenly become the next Google, Netflix, or Apple and potentially start trading in the hundreds.
It is also greed that causes novice investors to jump on penny stocks without doing the necessary research to find out that the company is not healthy and is low for a reason.
Remember, penny stocks are penny stocks for a reason.
With that said, let's get to some things you need to consider before getting involved with penny stocks Price manipulation Because the stocks are so cheap, they can be easily manipulated.
Companies create scams with penny stocks by buying up a lot of shares (usually thousands and millions) and then promoting the stock as the deal of a lifetime.
Once the company has built enough interest in the stock and caused an increase in the stock price, the company will then sell its shares and move on to the next stock.
You as the unsuspecting investor are left holding the bag.
Hard to do proper research Because of the nature of penny stocks, it will be hard to find news on a particular stock.
Investment companies almost never track the stock so finding the necessary information to make an informed decision will be hard.
Also, if the stock price of a company goes below a dollar, after a while it faces the possibility of being de-listed from whatever index it was/is listed in.
If this happens you will basically be at risk of losing all your investment in that stock.
Not very liquid Penny stocks are usually not very liquid so this will make it hard to buy and sell shares of the stock.
Also this means that the bid/ask spread (difference between the sellers asking price and the buyers asking price) will not be favorable.
This can translate into a lot of missed opportunities and in extreme cases an investor might not be able to sell his/her shares!