Penny stock investing Risks and advantages
Investing in penny stocks is often touted as a great way to make a killing in the stock market. It doesn’t take a lot of money, and a small change in the stock price makes investing in penny stocks look like a great idea.It would seem to have some of the volatile swings like commodities trading, but is something the average investor can do
Risk with penny stocks
Penny stocks definitely can make you more money if you invest wisely. There are people who will be telling you all about penny stock tips and these can be scams.Now there are some which are not scams and are genuine newsletters which have been put up by the good people who know all about the investing and the way the pennys stocks operate.
I would suggest that you should not keep on holding on to the stocks and just get out of the stocks once you have made your profit.
Why Invest In Penny Stocks
In the US, a penny stock is defined by the SEC simply to be a common stock whose price is under $5 a share. In general usage, though, most people also think of penny stocks as those stocks who not only are under $5 a share, but are not listed on one of the major stock exchanges, and quotes and trades are handled on the Pink Sheets or over the counter (OTC) on the OTC bulletin board. Generally these are stocks with a small market cap (that is to say the total value of all the common stock is relatively low). For this reason they can also be referred to as small caps, micro caps, or even nano caps.
Market volatility with small penny stocks
Low Cost of Entry –
Because the price of a common share is low (often under a dollar) it doesn’t take a lot of money to buy several hundred or thousand shares, and it just sounds better to own hundreds or thousands of shares than to own 2 shares of Google.
Large Percentage Moves –
One of the things that sounds attractive is that a small price move for a share price under a dollar translates into a large percentage move. A 1/4 point more becomes a 25% gain
Liquidity – Most of these stocks are thinly traded which leads to a lot of volatility. That means one of the biggest obstacles to investing in penny stocks is that there is not a lot of either dollar volume or share volume being traded in them. Because of this a relatively small number of shares being traded can cause the price to move, which means that the price will usually move against you if you trade large lots
Danger of Pump and Dump penny stocks
Do not go for the pump and dump type emails that keep floating around. Now these can be genuine too but you need to work on the strategy for these. You can easily get to investing in those and then just get out before this penny stock that has been pumped gets to be dumped.
“Pump and dump” is a form of microcap stock fraud that involves artificially inflating the price of an owned stock through false and misleading positive statements, in order to sell the cheaply purchased stock at a higher price. Once the operators of the scheme “dump” their overvalued shares, the price falls and investors lose their money. Stocks that are the subject of pump-and-dump schemes are sometimes called “chop stocks”.
Pump and dump schemes tend to take place either on the Internet including e-mail spam campaigns or through telemarketing from “boiler room” brokerage houses (for example, see Boiler Room). Often thestock promoter will claim to have “inside” information about impending news. Newsletters that purport to offer unbiased recommendations then out the company as a “hot” stock. Messages in chat rooms and email spam urge readers to buy the stock quickly
While fraudsters in the past relied on cold calls, the Internet now offers a cheaper and easier way of reaching large numbers of potential investors.