Many men and women who are new to trading in stocks think that penny stocks are the logical choice. The word penny indicates that the investment is small enough that they won’t have to risk a lot for a great deal of potential.
The truth is that investors, novice and seasoned pros alike, need to be mindful that while penny stocks may not cost a lot upfront in the form of cash in hand, it could cost you more if the company’s stock that you’re trading with collapses.
Penny stock investing, just like any other investment opportunity, requires the trader to look carefully at the company’s financial history and expected future earnings as well.
Brokerage firms that help penny stock investors trade in this type of transaction, are required to disclose the risks using a document that tells the customer exactly what the risks are before they choose to hand over their money.
Penny stocks, unlike other kinds of higher-priced stocks, aren’t traded as often, so one of the larger risks involves being stuck with penny stocks once you own them. And since they’re not traded often, the pricing you’re seeing can be inaccurate or out of date.
Perhaps the biggest risk in investing with penny stocks is the mere hype that goes along with it. People are receiving dozens of spam notices in their email inbox each day with promises of building a fortune with penny stock trades.
Some unscrupulous brokerage firms also acquire a lot of the penny stocks and then offer them to investors at a higher value than what they’ll be worth once the artificially inflated demand is gone.
Because penny stock investing requires such a small initial monetary investment, some brokers even break the rules and charge far more for their mark-up commissions. You have to be careful that they’re not overcharging you.
Another unscrupulous tactic brokers sometimes use is to refuse an investor’s request to trade them in for cash once they own the penny stocks. Then you’re stuck without being able to cash them out.
Most brokerage firms operate on a fair basis, but you want to make sure your firm is handling everything with your best interest and minimizing the risks involved with penny stock investing.