Penny Stocks - Are They A Good Investment?
Penny stocks are stocks that trade for less than one dollar. Is buying
a penny stock a good investment? Let's discuss the pros and cons of buying
penny stocks.
First, all penny stocks are different. Some penny stocks
are legitimate companies that have fallen on bad times and their stock prices
have declined below a dollar. While other penny stocks are companies that
have been delisted, abandoned, and then purchased from someone else for
hundredths of a penny per share. They may or may not be legitimate, and
because they are not listed on a major exchange, they are not audited and held
to the same standards as listed securities. Finding out if a penny stock
is legitimate is the most important and hardest thing to do. Many penny
stock companies do not have full disclosure and do not have investor relations
departments to contact. Before investing in a penny stock, do your
research and make sure the company is legitimate. Find out who buys their
products or services and call them to ask questions and to make sure they really
have a product.
Second, investing in penny stocks is beyond risky!
Because the stocks are not listed on a major exchange, they typically have low
trading volume and can sometimes trade for less than a penny. The fact
that they are illiquid and trade for pennies, means they can move a lot in terms
of percentage. For example, a stock that trades for 10 cents and has a bid
/ ask spread of 1 cent, can change by 10% depending on whether the buying or
selling price was reported. Furthermore, average trading volumes can be so
low that an order of a few thousand shares can move the price by more than 10%
(sometimes even more). This may sound attractive, but remember that when
you need to sell, you may have to take a 10-20% reduction in price to get rid of
your shares.
Also, investing in penny stocks is often about rumors and "pump
and dump" schemes. To get attention to a penny stock, penny stock
investors often send out mass emails about the stocks they own to get attention
to their stock. A few purchases and the stock soars. Then people
getting the letter think its a good buy and the stock surges more. The
people behind the email or website that promoted the penny stock sells and then,
a few days or weeks later, the stock is forgotten about and back below where you
bought it. It is very rare that a penny stock ever does well enough to
regain listing on a major exchange. For an example of penny stock
advertising, just search for "penny stock" and look at the sponsored listings in
the search results.
So, with all the manipulation, lack of regulation, low
liquidity and difficulty of getting accurate information, do penny stocks make a
good investment? We say NO. In fact, buying penny stocks are usually
not an investment at all, but rather a speculation or gamble that may or may not
pay off. So, unless you are looking to speculate and really know what you
are doing, we recommend avoiding penny stocks.
