If you are intrigued by the stock market, your email box is probably filled with mail espousing the value of penny stocks and how much money you can make by investing in them. But do you know what penny stocks are and can you really make money by investing in them?
Penny stocks are considered by the SEC as stocks that are valued at less than $5, rarely will you ever find a stock being sold for a penny. While there are stocks being traded on both the NYSE and the NASDAQ for below $5, few investors consider these when they are asked what they consider to be a penny stock.
The average investor considers penny stocks to be a bit of an untamed beast akin to wild horses on the market that is completely removed from the fanfare of trading on the major exchanges. The penny stocks market can see significant gains and losses, yet these types of trades rarely make the news.
Over the course of time, penny stocks have earned a reputation for being filled with scam artists, corrupt traders, and worse. You may find the penny stock market to be one of the wildest rides you have ever been on.
Can You Really Make Money With Penny Stocks?
The big question is of course, can you really make money by investing in penny stocks? When you stop to consider the risks involved in this market, this is a valid question. Why would any sane person want to risk their money in such a volatile market? Many believe that because this market is so volatile that they might get lucky and their stock will make a significant increase in value over a very short period.
The good news is that this does happen. All you need do is look online to find numerous success stories of those who have made their millions by investing in the penny stock market. The problem is that very few companies reach the point at which they make the move from penny stocks to “power stocks” (those trading on the major exchanges).
But, if you are fortunate enough to find such a stock, the payment can be extraordinary. The numbers vary a lot in the world of penny stocks, yet it is possible for an investment to make gains of more than 1, 000% in no more than a couple of weeks. The hard part is choosing the right stocks to invest in the first place.
How Bad Are the Risks?
Even if you invest in “legitimate” penny stocks, your investments are still a high risk due to low liquidity and lax rules with low reporting standards. According to the SEC (Securities and Exchange Commission), “Penny stocks may trade infrequently, which means that it may be difficult to sell penny stock shares once you own them. Because it may be difficult to find quotations for certain penny stocks, they may be impossible to accurately price.”
Put more simply, if you choose to invest in penny stocks, you could quickly end up with fistfuls of worthless stock you can’t unload.
The other concern that comes up when talking about risks is the lack of regulation regarding how companies whose stocks trade in the Pink Sheets or the Over-the-Counter Bulletin Board or OTCBB. The OTCBB requires companies to maintain current SEC filings, but these filings are far below those required for companies who trade on the exchange.
This situation allows companies who are delinquent if filing their reports to the SEC to continue trading, which in turn can lead to significant issues with scam artists.
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