Why Are Penny Stocks Risky To Invest In?
Monday, July 5th, 2010In USA, stocks which are dealt or traded for less than 5 dollars a share and are traded over the counter or in pink sheets are called penny stocks. They are known as penny shares in the UK.
Due to their ability to make upturns overnight they have been found to be very lucrative.
In spite of many regulations, fraud is still oftentimes likely to happen, because of the lack of knowledge or deeper penetration into company’s data. It is difficult to determine what is the real reason for a hype or growth in the price of the stocks or what Is driving it. Nevertheless more and more people are investing in penny stocks, because they would like to make big profits.
There are a large number of ways in which a penny stock can be pushed through to become a hot penny stock. A lack of liquidity generally makes the stock a very easy target for manipulation and if a big investor can push in money on it, the prices go up and it could result in getting noticed in the bigger markets and get some media coverage. This is all that is needed for even more people to buy the stock trying to make a huge profit fast. Once the maximum gain has been reached, the big investor will sell all of his shares and make a huge profit. The newbie investor on the other hand has to deal with the loss.
This cannot be done always as the liquidity of the company is questionable and this causes a lot of problems for the investors. Nevertheless there are a lot of penny stocks that make it big within some years because of a strong and healthy managment. If the company profile is carefully monitored such shares can be easily picked up based some inherent clues, and taken up. They are good for investors who are planning to start with a low capital and then take the business forward.
