A Warning About Buying Penny Stocks

Penny stocks are, as the name suggests, stocks that trade for a few pennies. Technically, a penny stock is any stock whose price is less than $5, but it is usually used for stocks that are a few cents or a little more than a dollar. No matter the classification, penny stocks are cheap and some people find them to be very profitable. They carry higher risk than normal stocks because if the stock of the company is faring very poorly, chances are the company might just fail or never really recover. On the other hand, if it does recover, then the profits can be astronomical. This is what a lot of investors find attractive.

Before you start investing in penny stocks, you should understand the risks. True, you might not make as much with a Google or Microsoft stock, but you are sure these companies are not going to fail tomorrow.

The first thing to remember in penny stocks is that it is very speculative. The price of penny stocks can be inflated from pure speculation because it is easy to do so. It is a common strategy used by investors – they find a cheap penny stock and buy it at a low price. Through the internet, it is easy to spread the word that this is a great stock. A number of people keep buying and the stock keeps growing in value. The initial speculators simply sell off and all the other investors are left with inflated price of a stock that is essentially worthless. You should always avoid buying penny stocks at their speculative peak. This is why, in trading penny stocks, timing is very important.

Because speculation easily drives up the prices, you will find a lot of free or paid information on the internet. Every so called expert is out there shelling out his wisdom and showing you a foolproof and guaranteed way to make money. Just remember that all of it is just not true. Penny stocks are like any other stock in that the price cannot be predicted. On the other hand, since their price can be manipulated, it is good to play safe. Do not buy just out of speculation. Research the company and invest wisely. The traditional rules of investing hold – invest if you think the company is solid and can pull it off despite difficulties. If you can spot such penny stocks, you can invest well in them.

That being said, not all stock picks are bad. If you understand how to use them and not buy simply from these picks blindly, you can make good use of them. You can, for example, research the companies that are mentioned in the stock picks. There are several free and paid services related to penny auctions. Before you invest your money in stock tips, make sure it is worth the money. There are a lot of scams out there on the internet so it can be hard to find genuine and legitimate stock tips. Make sure the person has a proven portfolio and experience in trading penny stocks.

I’m not an expert on stocks. Do not listen to me. You will lose all of your money.

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{ 5 comments… read them below or add one }

krantcents

Thanks for the information. I always avoided penny stocks because it looked to be too good to be true it is!

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Kevin

yea, you really have to watch your self in that game

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Robert @ The College Investor

Penny stocks are for fools and tricksters. I once met a guy whose whole investing life revolved around penny stocks…and he was always broke.
Plus, I’ve heard several stories about investment firms who IPO companies at the penny stock level, pump the price up to a $1 or $2, dump the stock, and then walk away.

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ralph@penny auction strategy

Nice tips about penny stocks.I following this advice. Buying penny stocks can provide an investor a very high return, the cause why an investor can come out on top during the buy of these stocks is because the low price of the stock.

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malibogster

Understanding the momentum is the most important to investing in penny stocks. The two most important factors to understand are a) never invest what you can’t afford to lose and b) never get greedy. Pump and dumps are so common with penny stock promoters but there are some that notify interested investors of companies that are actually value companies that sustain their gains. In October alone, we saw great gains in ANDS (323%), INHX (268%) and PEIX (86%) since their alerts were publicized. Quality companies who sustain their increase in shareholder value.

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