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Trading penny stocks – The advantages and disadvantages that investors must know.
Many investors use penny stocks to diversify their portfolio. Penny stocks are stocks that are valued at less than a dollar or stocks that are not exchanged in the New York Stock Exchange, NASDAQ, or other regular stock markets. Some people consider that penny stocks can be quite lucrative; whilst others consider that they are a sure way to lose money. Any investor interested in trading penny stocks to diversify their portfolio needs to be aware of all the advantages and disadvantages of this form of investing.
Penny stocks are enticing to first-time investors as they are sold at such a low price. This low price gives novices the opportunity to explore the markets, whilst investing just a small sum of money. This also means that if the stock does fall, the losses for the investor will be relatively small.
Penny stocks are easier to buy then traditional stocks. They are sold as common shares, which are readily available to the public. Every stock exchange market lists penny stocks for the benefit of the general public.
Penny stocks bring potentially high returns on investment. It is more common for penny stocks to double or triple in price in a short period of time than for traditional stocks. As a result, a small and carefully placed penny stock investment can be very profitable. Penny stocks of a company that is just starting up can have a good potential for growth.
There are a large number of opportunities in the penny stocks market. Investors can look for multiple stocks instead of putting a lot of money into one or a small number of stocks.
Penny stock companies are not regulated by the SEC, hence such companies sometimes have very little business history. They are not obliged to report their assets, report administration changes and so on. This makes it very hard for the investor to be confident in the future of the company and hence be sure that the investment will be profitable. Sometimes investors even get scammed in the penny stock market by such unregulated companies.
Whilst you can find penny stocks that are trading at a very low price, this can often mean that the company is experiencing major difficulties, and maybe even nearing bankruptcy. Whilst investors hope that such a company will recover and the stock price will rise dramatically, this can be a very difficult prediction to make even for seasoned investors.
Many penny stock `experts` are in fact paid to give positive recommendations about a company`s stock. This means that you can be the recipient of falsely constructed penny stock information. For example, someone in a company buys stocks and then reports how well the stocks are performing, raises significant investment from his recommendations, and then sells all his shares at a huge profit, as a result of which the stocks plummet and the investors suffer a big loss.
So if you are considering investing into penny stocks to diversify your portfolio, keep these important points in mind.
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The information supplied in this article is not to be considered as medical advice and is for educational purposes only.
|Penny Stock Trading4 Aug 2010|