What are Penny Stocks? They are stocks that are very cheap; ranging from pennies to a few dollars. For a first time investor, they might look very appealing, but you still have to do your homework. I’m sure everyone would love to get in on the ground floor of the next big thing before it takes off, but the chances of that happening are somewhat like the chances of winning the lottery. It’s usually very difficult to research the companies that offer penny stocks. They are noted for a lack of information about the company as well as a lack of history and standards and sometimes, ethics. Here’s some reasons that penny stocks can be a risky investment.
Lack of Information and History
Private companies do not need to make their financial information and other company data known to the public, as does a public company. Companies offering penny stocks are often just moving from private to public, so there’s very little information available on them. These companies could choose to offer some company information before going public, but without a history, that information may not be valid. You have little to no background information on the company you are thinking about investing in, so the risk of losing that money is greater.
Lack of Standards
There is less regulation of penny stocks by the SEC and other governing bodies. They are not on the top charts, so there is no minimum standard for them. The data for these stocks may be outdated. In addition, the companies that are offering penny stocks aren’t necessarily young, up and coming companies. They may also be a “demoted” company that is trading on the lower charts. While some penny stocks may be a worthwhile investment, the risks are greater than with stocks on the top charts.
Lack of Ethics
To attract buyers, the companies selling penny stocks often decrease the price until people start buying. Because they are so cheap, people often buy a large amount of them. Then they hype them up and sell them after other investors become interested. This is known as “pump and dump” and it inflates the price of the stocks temporarily, only to have the prices drop back down in a couple of months when nothing is happening with the company.
With the lack of company information.on penny stocks, no history or standards and often dodgy ethics, only you can decide whether or not penny stocks is something you want to invest in. While the price might seem very attractive to you, the associated risk may very well not be worth it.