It’s wise, but penny stocks are actually any stocks that trade for under five dollars or it can mean any stock that’s not traded through the big exchanges. Penny Stocks are usually high risk investments you’ll 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 handsome profit. 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 must be extremely careful and ensure 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 various 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 in order to get investors to buy their stocks. When they’ve sold the stocks they will then sell their shares causing the price of the stock to rapidly deflate. There are numerous 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 can be useful in helping identify which ones to step back from. Penny stocks are commonly traded outside the major exchanges because the companies selling them are kicked from the major ones for not meeting the minimum bid of $1 for a consecutive time period.
Once this happens the stocks are usually on the 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 usually are a risky if you don’t know what you’re doing and even sometimes when you do. You might not even realize you’re buying penny stocks if you buy them at the inflated prices. Just be cautious with what you do and be sure to check out the company, chances are if their stock has risen rapidly recently, they most likely are not very reputable.
