When you hear the word Penny Stocks you naturally think stocks for a penny.
It’s wise, but penny stocks are actually any stocks that trade at under five dollars or it can mean any stock that’s not traded through the big exchanges. Penny Stocks tend to be high risk investments you will want to take some serious precautions with. Penny stocks penny stocks aren’t really for those of us with little experience in trading stocks.
They tend to attract new traders because of their low cost, but have high potential for fraud. These stocks are usually the vehicles for schemes like pump and dump. A pump and dump scheme is when someone sells a stock for an inflated price, and then the seller dumps the overpriced shares. This causes the price to drop and the investor to potentially lose a lot of cash. Also since penny shares are worth so little they’re often not tracked or reported which raises the potential for fraud. These are high risk investments and should be treated as such. However, if you’re experienced in trading you will get a return and make some money. You simply need to be extremely careful and make sure that the company you buy the penny stocks from is reputable. Often companies will talk about their economic growth and will claim that their stock is high demand. These companies are sometimes mentioned on the radio and other sorts of things.
You might even see glowing comments on their message boards and other mediums. These postings are sometimes done by an individual or even an entire team and they tend to block out those people who are critical giving the impression that it’s a great company to acquire investors to buy their stocks. The moment they’ve sold the stocks they will then sell their shares causing the buying price of the stock to rapidly deflate. There are many companies that are devoting themselves to tracking penny stocks so that people know which ones are fraudulent. Penny stocks are often sent through spam and these trackers are needed in helping identify which ones to stay away from. Penny stocks are commonly traded outside the major exchanges because the companies selling them are kicked out of your major ones for not meeting the minimum bid of $1 for a consecutive period of time.
Once this happens the stocks are usually in OTC Bulletin Board. The NASD has been attempting to clean the Bulletin Board by requiring companies to submit quarterly and annual reports to the SEC to keep fraud rates down. The truth of the matter is that penny stocks are generally a risky if you don’t know what you’re doing and even sometimes when you do. You will possibly not even realize you’re buying penny stocks if you purchase them at the inflated prices. Just be cautious with what you do and make sure you browse the company, chances are if their stock has risen rapidly recently, they might not be very reputable.
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