Why Penny Stocks Are Risky?

Why Penny Stocks Are Risky?

When you are looking at a retirement investment portfolio, the higher the percentage of stock investments, the more aggressive the portfolio is.

In general investing in the stock market is considered high risk already.

Add penny stocks to the mix and you have greatly increased the risk factor.

But with this high risk comes the potential of high reward, otherwise people wouldn’t engage in high-risk investments.

If you are thinking about getting into penny stock trading, it is important to understand why these stocks are considered high risk.

Cheap Does Not Always Mean A Good Deal

It is common to make the assumption that getting something cheap means you are getting a good deal.

But you probably know from experience this is not always the case.

With some goods and services it is worth paying more upfront because cheap products or services may not provide the quality or longevity you want for your money.

Buying 2,000 shares for $2,000 may make you feel like you are getting a better deal than if you would spend that same amount for only 20 shares.

However, when you purchase fewer shares in a solid company that has continually climbing stock prices you have less risk than if you buy thousands of shares of an unknown new company that may or may not succeed.

Uncertainty Of Unproven Companies

While these companies are still required to maintain accounting records and report to the IRS, the Securities and Exchange Commission does not sanction penny stocks.

These smaller penny stock companies often don’t have to adhere to the same strict rules or reporting standards as the larger companies on the major exchanges.

Another thing to consider is the possible impact of poor decisions.

If a poor decision is made at a bigger company they may take a hit from that poor decision, but they are more likely to bounce back from it.

If a small company makes the same poor decision, it could cripple them or even end the company.

Volume Trading Adds Complication

When dealing with high volumes of low value stock of an unproven or struggling company it can add complication.

The object is to buy low and sell high, but if the stock price starts dropping and you want to sell your shares and get out, you need to find a buyer.

If no one else is interested in buying a dropping stock you may be stuck with your shares, or you may have to sell them at an even lower price.

Trade executions aren’t guaranteed with these stocks because they aren’t sold on the major exchanges like NASDAQ or NYSE.

Less Regulation

This brings us to the other reason why penny stocks are risky.

Unlike stocks found on the major exchanges, penny stocks often don’t have to adhere to the same strict rules and regulations to be on the bulletin boards where they are traded.

It is also more difficult to find information about these lesser-known companies.

Penny stocks will always draw attention because of the potential of high profits.

This can be a very lucrative market, but it is important to understand the risks before you dive in, expecting to get rich.


Penny Stock Egghead Risks And RewardsCreated by Kevin Brown – author of The Definitive Guide To Swing Trading Stocks, Swing Trader Guide is his online trading course that teaches people how to make money from stocks even if they have no experience and knowledge.

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