Pros and cons of investing in penny stocks

Typically, when you think of trading stocks, major stock exchanges may come to mind such as the New York Stock Exchange (NYSE), the National Association of Automated Securities Trading (NASDAQ), and the Stock Exchange. of the United States (AMEX). A Penny share is a low-priced security for a very small company with a market capitalization of less than $ 500 million and is typically traded in very low volumes. Penny’s shares are also listed on other “over-the-counter” exchanges such as OTCBB and Pink Sheets.

Due to the low trading volumes, penny stocks are an investment option that carries a considerable amount of risk. According to the Securities and Exchange Commission, prospective investors in penny stocks should be aware of the fact that due to the low trading volume of these stocks, an investor may not find a buyer for their stocks. Finding accurate price quotes is also difficult, so there is a great chance that an investor could lose their entire investment.

Penny stocks have a certain appeal to many different types of investors. However, a new investor looking for potentially lucrative investments with a fairly low entry price is likely to find a penny stock. The appeal comes from the fact that at such low prices, any change can often be measured in hundreds of percent on a given day or two. The value of an investor’s shares can literally double or even triple the amount of the original investment.

In contrast, the price of a penny stock can go down in value just as quickly. New and inexperienced investors would do well to avoid making penny stocks a major part of their investment portfolio. Also due to low listing requirements on exchanges like OCTBB and Pink Sheets, many companies should not be considered safe investments. Many of the companies listed on alternative exchanges lack sufficient financial history to be able to accurately determine whether or not they would make a good investment. In some cases, companies that are considered penny stocks are startups or, in some cases, dangerously close to bankruptcy.

Unfortunately, some traders have even artificially manipulated stock prices by buying large amounts of stocks and then convincing individual investors of the need to buy. Since most of these stocks are not in such high demand, an investor will have to lower their selling price to attract a bidder, often at a loss.

Not all companies that trade for “pennies” should be considered fraudulent. Some are just small companies trying to grow their business and are working very hard to end up in the biggest market exchanges. It may not be worth scouring the scam companies to find truly reputable companies capable of helping an investor make big profits. Investors with low investment income may be convinced that a single good trade can triple their investment, but in the end, it is better for an investor to choose an investment from a company that they have done research and are convinced that the value of this company will grow. in the future.

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