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The Dangers of Penny Stocks
There are
several reasons why it is dangerous to trade penny stocks. These stocks can seem
very attractive to beginners so please read the warnings below.
Definition: Penny stocks are defined as stocks with a price per share of less
than five dollars (or one dollar in some cases). Many of them trade on the
OTC/BB (Over the Counter, Bulletin Board) stock exchanges, where they are
sometimes known as Pink Sheet stocks, and they might have symbol extensions like
.PK or .OB.
Volatility: A typical "blue-chip" stock with a price of twenty dollars will
typically only fluctuate by one to two percent per day while a penny stock could
easily go up or down ten or twenty percent or more. In fact, it is not uncommon
to lose eighty percent of your investment within a week!
Scams: "Alert! XYZ is at $0.024 and is expected to hit $0.35 at the end of the
week!" You have probably received several emails like this. Penny stocks are
subject to frequent spam email attacks.
In the classic "pump and dump" scheme, a person or company will buy some stock
and then email many people telling them that stock is going to go up a large
amount. Many readers of this email will then buy that stock, causing its price
to go up dramatically because of the law of supply and demand. Once the stock
price has gone up, the scammer will sell his or her shares for a sizeable
profit. The stock price will then usually drop back down significantly because
the stock was overvalued. This results in many unsuspecting investors losing
lots of money. This is a very common problem and the Securities and Exchange
Commission actively tries to detect these scams and charge these criminals.
Limited Information: For many penny stock companies, there is very little
information available online. This is due to the fact that many of them trade on
the OTC/BB exchanges, which do not require extensive reports to be available to
the public. Without the appropriate information, it is very hard to make solid
investment decisions.
Conclusion: Now that you have a better idea of what penny stocks are and
how dangerous they can be, please be careful as you move forward with your
trading strategies. You do not have to stay away from them completely. In fact,
I recommend you try a couple of them using a small amount of money, just to
"scratch your itch" and see for yourself.
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