Why to Avoid Penny Stocks

Why to Avoid Penny Stocks

If you spend anytime searching on the internet for the “stock of the year” or anything along those line, you have probably seen ads for penny stocks. To start off, a penny stocks is simply a stock that trades for less that $1 per share. Penny stocks are very appealing for the young, new investor that does not have a huge portfolio balance to buy 100s of shares of Google stock. Even though the stock seems cheap and at a discount, there are many other places to put your hard earned money.

Penny stocks do not trade on the big three indexes; S&P 500, Nasdaq, and the Dow Jones Industrial Average. These micro cap stocks normally trade on what is called the Pink Sheets. When a company trades on the pink sheets or over the counter, that is a sure sign that the company has not proven itself to trade on the big indexes. Most penny stocks do not even make money. It is basically gambling. Since the stocks do not trade on certain indexes, the companies are not required to post annual reports as the bigger companies.

why to avoid penny stocks

I have traded penny stocks much like most investors, and I must say, I lost a lot of money. These stocks are crawling with basically thieves looking for the young, gullible investor to buy a million shares for a mire two hundred dollars. There are some success stories in trading penny stocks, but those are few and far in between.

 

Below are three reasons you should avoid penny stocks at all cost:

As stated above, the penny stock market has lax regulations when compared to the overall market. It is not rare to see a company post a fake sales contract or other reports to boost their stock price.

The first red flag you should notice about penny stocks is that companies advertise their ticker symbol to get investors to buy their stock. Believe me, if their stock is going to go up 1000% tomorrow, they would not be advertising it.

The final reason you should avoid penny stocks at all costs is because of something call “pumpers and dumpers.” I am sure you have seen websites wanting you to subscribe to their email newsletter for the next big stock pick. This is most certainly a scam and is made to artificially inflate the stock price while the people behind the ads sell their shares and make millions.

Please do not fall for the penny stock scheme. It is not easy to get rich, and almost impossible to get rich overnight. Take my advice and stay far away from penny stocks unless you want to lose your entire investment.

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