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- 1. Very High Price Volatility
- 2. Liquidity levels
- 3. You might find them unreliable
- 4. They might not be as cheap as you think
- 5. Highly prone to speculation
- 6. Penny Stocks don’t usually see Minimum Listing requirements
- 7. Unfortunately, Penny stocks are rife with fraud
- 6. Don’t trust your stockbroker blindly
- Final Thoughts!
Reading time: ~4 minutes
If you want to get rich with penny stocks, first forget about getting rich. First, your goal should be to know as much as you can about penny stocks. This knowledge will eventually help you make profits in the future.
Penny stocks are quite enticing, and even with their low value, they sometimes help you make high profits. But as they say, there is always a chance of potential big losses.
Several people engage in penny stocks, and the numbers have only risen since 2020. But the problem is that most new investors dive into this pool without sufficient knowledge. This leads to their downfall. Of course, it would help if you weren’t one of them.
Below, I have rounded up six things you need to know about penny stock trading to help you soon.
1. Very High Price Volatility
In layman’s terms, trading in penny stocks means that the higher the risks, the higher the profits. For people who don’t know, price volatility means the degree of change in the prices of stocks.
High price volatility means that the price changes quite often, making room for higher returns or potential loss. This is why it is said, higher the volatility, the riskier the investment.
2. Liquidity levels
Liquidity levels are quite low, making it difficult for investors to sell shares when they need to. This leads to few investors, in turn leading to few buyers.
This is because as high risk is involved in penny stocks, fewer people trade in them. All of this cumulatively leads to low liquidity levels.
3. You might find them unreliable
Penny stocks come from organizations that are relatively small in size. A company’s small size is a direct indication of it being riskier than many large companies.
The reputation of such small companies is not yet proven, plus they don’t have enough financial strength.
4. They might not be as cheap as you think
Why people find penny stocks so enticing is that their face prices might look really cheap, which is psychologically really attractive.
But what most new investors fail to understand is that the prices might only be cheap on the surface level. Understand that the prices do not really or immediately imply the value of these stocks.
5. Highly prone to speculation
Speculation is a bad thing, and when we co-relate the same penny stocks, it is not difficult to understand why it is so bad to speculate.
Penny stocks are often targeted by market speculators, low prices, and billions of outstanding shares, making them tempting for investors. This is the reason why many people find it easy to speculate and gamble.
It is really enticing to see a penny stock company’s chart, to see how much it grows in such a short time. But what people do not understand is that they are false, misleading statements and get fooled by the same.
6. Penny Stocks don’t usually see Minimum Listing requirements
The stocks that are traded in major exchanges are subject to a strict requirement. For instance, stocks traded in New York Stock Exchange are subject to a minimum stock price of $4 and have a minimum requirement of 1.1 million publicly traded shares, with at least $40 million. And lastly, they also require 400 shareholders, and each one of them should own at least 100 of the company’s shares.
You must be wondering why the rules of the game different for penny stocks are? This is because the companies that issue penny stocks aren’t yet profitable enough to meet these stringent listing requirements. Or because they do not have a proven track record. This also explains why penny stocks are highly speculative markets.
7. Unfortunately, Penny stocks are rife with fraud
As we discussed in the previous point that you must not trust your stockbroker blindly. Similarly, there are many fraudsters out there who make a living out of preying on inexperienced investors. This has led to the fraudsters scamming people in primarily two ways.
- Pump and Dump: In pump and dump scams, these fraudsters start hyping up about a company, leading to high share prices. They do so by spreading fake news through email newsletters, message boards, or even feed fake information to infamous news channels. Then, with a hike in prices, they end up offering inflated shares to unsuspecting investors.
- Short and distort: This type of scam is also known as short selling and is completely the opposite of pump and dump. This is when the scammers start to bet that the stock’s value will drop shortly. So they spread false-negative news that the stock will become worthless in the future. But in reality, the stock’s price plummets, and they make a significant profit by just making you believe in false news.
6. Don’t trust your stockbroker blindly
You need to understand that most stockbrokers see penny stocks as a lucrative business for them. For them, it is their means of living, and the reason why they are compelling you to invest in specific stocks might be because they have a higher commission in them.
I am not saying that your stockbroker is not trustworthy. I am also not saying that his advice cannot help you reap profits. Yet, it’s always wise to do your own research and keep your walls high!
Penny stocks can be a great option for some people to generate passive income. But at the same time, it is important to know where you will invest your money.
It is crucial to be on top of your research game before you jump to put your money straight in. This means you must read all articles that talk about “penny stocks to buy right now” or “penny stocks all set for a new high.”
All these tips can give you a great head-start but remember, nothing beats experience. Your first portfolio is going to suck, but eventually, you will get better.
Thank you for reading!