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What You Should Know About Penny Stocks

16 May 2011 16 Comments

The following is a guest post:

They are as inexpensive as they sound. Penny stocks are small shares of a business that typically fall under $5 on the stock market. These stocks are a great way for beginner investors or investors on a limited budget to integrate themselves into the world of stock trading, and have proven time and time again that it is possible to make a ton of money by spending so little. This in return has generated a small population of penny stock experts who are willing to provide you with the same process they took to become wealthy off penny stocks. One perfect example is Timothy Sykes of TimothySykes.com, who managed to turn $12,415 into $2 million in a matter of four years while in college.

While inexpensive, there are certain risks involved in the penny stock market. The most important thing to do before investing is do your research. Follow different guides or subscribe to email lists about stock tips to ensure that you are putting your money in a safe fund with a guarantee of a good return.

The biggest risk to keep an eye out for while investing in penny stocks is the “pump and dump” scheme, a form of stock fraud. In a “pump and dump” scheme, a company will buy thousands of penny stocks, then vigorously promote them using faulty information that will get investors interested in purchasing. Once the stock is sold to thousands of investors, the original purchasers will sell their stock for the inflated price, then leave the rest of the stock to fall, resulting in a sometimes significant loss for other investors.

To differentiate whether a stock is pump and dump, check its history and breadth of promotion. If an extensive amount of work has been done to promote a particular stock, proceed with caution. Especially look out for small, unfamiliar technology companies that boast revolutionary new products. Also keep your eyes peeled for young companies that manage to grow extensively in very little time, or companies with high revenue but few expenses. An important maneuver for those beginning investors is to stick with companies registered through the Securities Exchange Commission, which monitors the ethical and financial practices of publicly traded companies. Those not registered are a much higher risk of being scams.

No matter the level of investment, there is always a major risk involved. To minimize that risk, take a few minutes to get yourself up-to-date on your investments and even subscribe to stock tip newsletters and blogs about what to watch in the stock market that will point you in the right direction. Never invest money that you cannot afford to lose. The stock market is a game of cat-and-mouse; it is an ever-changing system that even season veterans cannot master all the time. But after gaining a little experience investing and keeping a watchful eye out for suspicious activity, you will find much success through investing so little.

16 Comments »

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  • JohnsonSmith said:

    In my opinion the biggest risk to keep an eye out for while investing in penny stocks is the “pump and dump” scheme, a form of stock fraud. In a “pump and dump” scheme, a company will buy thousands of penny stocks, then vigorously promote them using faulty information that will get investors interested in purchasing.
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  • aimhighprofits said:

    The two most important factors to understand are a) never invest what you can’t afford to lose and b) never get greedy. Pump and dumps are so common with penny stock promoters but there are some that notify interested investors of companies that are actually value companies that sustain their gains. In October alone, we saw great gains in ANDS (323%), INHX (268%) and PEIX (86%) since their alerts were publicized. Quality companies who sustain their increase in shareholder value.

  • malibogsters said:

    The two most important factors to understand are a) never invest what you can’t afford to lose and b) never get greedy. Pump and dumps are so common with penny stock promoters but there are some that notify interested investors of companies that are actually value companies that sustain their gains. In October alone, we saw great gains in ANDS (323%), INHX (268%) and PEIX (86%) since their alerts were publicized. Quality companies who sustain their increase in shareholder value.

  • Warren Buffett said:

    A stock market or equity market is a public entity (a loose network of economic transactions, not a physical facility or discrete entity) for the trading of company stock (shares) and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.

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