What Are The Risks of A Penny Stock Trade
Tuesday, December 29th, 2009 Subscribe To Our Feed
A penny stock trade can be the smartest thing you do, or it could be the worst. Things tend to run in the extremes with this part of the stock market, and this is an important fact to be aware of if you want to invest in penny stocks. There are far greater risks with these types of shares, despite the impression that because these stocks cost less per share it is a good investment for beginners. To succeed as a penny stock investor you need to have experience and you need to understand the risks so you can avoid becoming a victim like so many other people out there.
The main reason why penny stock trading is more risky than traditional trades is that the penny stock market is far less regulated than the secure exchanges like NASDAQ. Without the requirement to adhere to certain rules and regulations that the traditional exchanges provide, there is a greater potential for deceit and illegal activity. While some penny stocks do trade on the major exchanges, it is the ones that do not that are riskier.
When considering penny stock trades, you have to take into account the practice of the pump and dump. What happens here is that shady individuals and groups will attempt to drive up the price of a stock through manipulative means, and then sell all their shares, leaving others with the now worthless stock. Typically, this occurs by posting false information about supposedly hot penny stocks, encouraging those who know little about the financial market to invest in certain stocks, and spreading false details about different companies through spam, penny stock newsletter publications and various message boards. Once the stock has been pumped up artificially, these people will sell their shares at a substantial profit and cease all promotion of the stock, resulting in the drop of the stock price.
Even if you are considering a penny stock trade with a reliable company, there are still other risks. The main risk is that penny stocks tend to move quickly either up or down. Profit can be small or large, but either way it requires a great deal of monitoring of the stock market to be able to sell at the right time. If you don’t check your investments regularly and often, then you could end up losing more money than you gain. The difference of half an hour can mean the difference between a profit and a loss.
To make each penny stock trade count, know what you are dealing with and dedicate yourself to making the right decisions. Remember, there is a lot of penny stock information out there that is designed to cost you money, and because the regulations in this market are not strong you cannot expect assistance from someone else to protect you. Know the risks and be prepared to dedicate your time along with your money or you will most likely lose the latter.
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