Why Penny Stocks Are Not a Wise Investment

KaraSkinner By KaraSkinner, 1st Jul 2015 | Follow this author | RSS Feed | Short URL http://nut.bz/32a35t1f/
Posted in Wikinut>Money>Investing

This article explains why penny stocks are a bad investment, especially for beginning investors.

Why Penny Stocks Are Attractive

Penny stocks are very tempting investments to pursue. According to the Security and Exchange Commission, penny stocks are sold $5 and lower, making it is easy to buy up a lot of shares without spending a significant amount of money compared to other investments. The idea of getting in on the ground floor of the next Google or Apple is enough to make beginning investors interested in penny stocks. But even though low amounts of money are being risked, is penny stocks really worth the time and money?

Myths of Penny Stocks Debunked

There are a couple of misconceptions that automatically attract investors to penny stocks. One is that there is no place to go but up. The cheap prices per share make people believe that there is more room for success without realizing that there is also a downfall. If you buy two hundred and fifty shares at $2 a piece, then it is possible that they will all double to $4 a piece by next week and you will have made $500. But it's also possible that they will all drop to $0.01 and you will have lost your investment.

The second misconception about penny stocks is that the big companies today used to be them. This is actually not true in a lot of cases. When companies go public, they often offer their stock on the New York Stock Exchange as regular stocks instead of as penny stocks. According to Investopedia, one Microsoft share was worth $21 on its first day of trading and Walmart was worth $16.50. While it is possible that the next big thing is floating around in the penny stocks, chances are, it is already worth more than $5 a share.

The Truth of the Penny Stock Market

If you enjoy researching for hours on end, then you might be successful on the penny stock market. But it's a very risky move that even experienced investors often steer clear of. For beginning investors, penny stocks are almost a sure way to lose money. Here are problems with it:

It's a place for scams. Because of the lack of information on new companies, it's an easy place for different scams, including biased recommendations, and boiler room scams.

There is very little information Most companies on the penny stock market either have bad records or no records of credit. While it's common sense to steer clear of those with bad credit records, it's almost impossible to know which companies with no records will be profitable.

Even if your stock improves, you might not find a buyer Penny stocks are known for fluctuating quickly so it seems like a good plan to buy low and sell high. Unfortunately, what's good in theory isn't always good in real life. When you're ready to sell, there isn't aways enough interest for you to be able to sell at the price you want and you might have to offer low for it to be sold.

So even though the penny stocks might be attractive to those who don't have a lot of funds, it is a much better idea to save money for more conservative investments in the future, like mutual funds.

Sources

http://beginnersinvest.about.com/od/Penny-Stocks/fl/Investing-In-Penny-Stocks-Is-Almost-Always-a-Bad-Idea.htm

http://www.investopedia.com/articles/03/050803.asp

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Investing, Investment Tips

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Comments

author avatar Sivaramakrishnan A
3rd Jul 2015 (#)

I agree. We venture into uncharted territory where there are more sharks looking for easy prey! siva

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author avatar GV Rama Rao
6th Jul 2015 (#)

Thanks for warning us in advance.

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