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Should You Buy Penny Stocks?

by Carlie Evie

Have you wondered if you should buy penny stocks? It's a good question. Why don't we weigh some of the pros and cons?

In the United States, a penny stock is one that trades for less than $5 per share on any market. On the other hand, the term can also apply to any lower priced and easily manipulated stock. It will often refer to a stock sold outside NYSE, NASDAQ, and MEX, the three major stock exchanges.

Penny stocks, because they are priced so low, are a tempting way to get into the stock market. Their low prices mean they have the potential for increases of several hundred percent over a few days. But they also have a huge potential for steep losses for the same exact reason.

If you buy penny stocks, you may find that they are harder to sell than you anticipated. These stocks are not traded nearly as often as the more popular and higher-priced stocks. They have fewer investors.

On top of that, if the stocks you're looking into are listed on an exchange that isn't well known, they are probably not subject to all the minimum standards and listing requirements that other stocks are held to. This makes them less stable.

Another thing: Penny stocks are a great source of income for fraudulent individuals. This is due to the stock's less known status. Many investors have been misled by these people through spam emails and internet message boards.

What they do is they encourage investors to dump huge amounts of cash into a stock that has no growth potential, then bailing out and selling their own shares as soon as the prices rise. This scheme, called a "Pump and Dump" results in huge profits for the fraudulent, and huge losses for the naive.

The cheap prices might make you inclined to buy penny stocks. But before you invest any kind of money, be aware of all the potential pitfalls. Know the track record of the companies you're investing in!

Visit How to Buy Stocks and get all the free help you need in discovering How to Trade Stocks, Best Stocks to Buy and so much more!

Published December 5th, 2007

Filed in Business, Marketing


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