No type of investment is risk free, but if you listen to the hype of some investors, you would think penny stocks were the beginning and end of your financial future – with no risk involved whatsoever. But that simply is not true, and here are some of the risks associated with penny stocks that you need to look out for.
The Wild West of the Stock Market
Thanks to lack of regulation on some of the smaller markets they trade in, plus factors like the absence of earnings reports, penny stocks are known for their wild swings in price and volume, so enjoy the ride. The next time you leave your computer for a bathroom break, you may come back to learn your favorite penny stock has skyrocketed 25 percent – only to tumble to the deepest ravine price while you went and got some coffee.
Does Low Liquidity Equal High Risk?
It might, and here is why. Unlike the stocks listed in major exchanges such as the London Stock Exchange or the NASDAQ SmallCap Market, many penny stocks have very low daily volume. In other words, you can buy a share, and then have no one to sell it too – good luck with that scenario. According to most reputable analysts, the average penny stock seeks trading volume equal to only a few thousand dollars each day. A key point to remember is need to see a stock’s ability to be sold without causing a significant movement in price and with minimum loss of overall value. This makes for faster entry and exit, especially in a market where stock prices can drop like a rock. Money Runners Group specializes in high liquidity stocks always leaving you with someone to sell to.
Lack of Reputable News
Because penny stocks are so inexpensive and trade at such minimal volume, you hardly ever see them mentioned in major financial news outlets. When was the last time you saw an analyst from the BBC, CNN or Fortune talk about your favorite penny stock? You guessed it – hardly if ever. If a penny stock was worth something, you should find someone talking about it – and not just around the coffee machine at the office.
Where is all the Regulation?
Most markets that list penny stocks do not have any sort of regulated listing, which is something to consider for anyone investing in stocks. They do not have to meet compliance and reporting requirements, meaning these companies tend to be smaller. The best penny stock advice we can give? Simply avoid those traded over the phone or sold directly from the company.
Keep your eyes open for other red flags, such as bankrupt company shares that are still trading, stocks with five letter ticker symbols, and share prices for a fraction of a penny that have low liquidity. The bottom line is to do some research, find the latest information, and see what legitimate analysts have to say before getting into penny stock trading.
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