The penny stock industry is one that is weighed down with a history of penny stock swindles. Fortunately for the average trader, the SEC is normally there to safeguard us from these fraudulent companies. Public corporations that you can invest in have been required to report important records of information to the SEC to ensure that this material is public and there is actually transparency in the markets. Without this requirement, public companies could possibly state they have increased profits when they don’t, and anyone invested in that deceitful company would find their stock worth nothing when it became known that the company is just a shell, generating little to no income.

Penny stocks trade on an exchange that is mostly not regulated by the SEC (Known as the OTCBB and Pink Sheets). Many penny stocks are basically shell companies, that go through cycles of momentum and stock price gyrations as a result of people who buy and sell them. One day a penny stock can be up 300%, then the subsequent day it can be down 90%, yet literally nothing at all has happened in relation to the company. Here are the reasons to steer clear from Penny Stocks:

Thinly Traded and Price Volatility

Unlike the stocks listed on major stock exchanges such as the Nasdaq, penny stocks usually trade very thinly. What this means is that you could invest in shares of a penny stock, and have nobody to sell it to. Typically, penny stocks have volume equivalent to several thousands of dollars being traded daily. You need good liquidity in a stock in order to make a fast entry and exit, particularly in penny stocks where the stock price can plummet rapidly.

Penny Stock Scams

If you ever have received an email or perhaps seen an advertisement that claims you need to immediately invest in a penny stock then you possibly have been a target of a pump and dump swindle. The idea powering this is to create unsubstantiated hype for a penny stock the pumper already owns, then as their targets buy into his hype and drive up market price of the shares considerably, the pumper then sells his or her shares for a substantial profit. Meanwhile, those who fell for the hype will quickly lose their money as the upward stock momentum drops and the stock price heads south. These are often times boiler room stockbrokers who after they dump the stock they close up shop and begin again under a new name.

Inability to Preliminary research

Penny stocks differ from the stocks on major exchanges in that they have little to no following at all. You practically never find a penny stock being discussed by the financial news media. There are usually no analyst research on penny stocks. This absence of analysis is viewed as by many what is good about penny stocks because you can uncover the next hot stock before the street does.

Enjoy the Ride

Penny stocks are known for their wild shifts in momentum. You could walk away from your trading station for an hour and return and realize your penny stock went up 30%, then fell into the red. With penny stocks, you need to devote many hours every day watching your positions, otherwise you chance losing out on the chance to sell at a gain.

If you persist on wagering on (not investing in) penny stocks then make sure you are using cash you can afford to lose and have a strategy for selling. Before trading do yourself a favor and visit the site below.

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