With a promise of 100% to 1000% in profits, investing in penny stocks seems very appealing especially to those with a get-rich-quick mentality. However, great rewards are not without great risks. Penny stocks have the potential to double in price in a few weeks, but you can also lose everything within days.
There are five ways to greatly reduce the risks of penny stocks.
1. Do not be lured by hot stock tips. In this electronic age, it has become easy for fraudsters to scam as many people as possible. Every day you receive spam email on money-making schemes, and one of them could have promised fantastic guaranteed returns on a hot investment. These emails, or phone calls, will attempt to give you the impression that purchasing their product is an only-available-now opportunity for you. You are very likely the target of what is called a "boiler room" scam operation.
These operators usually buy shares that are worthless for a very cheap price, often at fractions of a penny, and then they attempt to manipulate them for a few dollars per share.
2. Avoid trading penny stocks over the counter. Unlike the Nasdaq or AMEX, unregulated markets do not compel companies to meet stringent listing requirements. Companies trading on the OTCBB or the pink sheets do not need to file financial statements with the SEC, nor are they obliged to disclose financial information to the public.
3. Look for stable trading activity. Penny stocks with erratic trading activity are difficult to sell. You could be stuck with the shares for a long time because no one wants to buy them. Look for companies with sales that are steadily growing and invest only if the company has an honorable executive team in which expansion is one of their main priorities; that way, you can ensure that a certain company will stay in the stock market.
4. Avoid companies that refuse to divulge information. When you invest in a company, you want to know where and how your money is being spent. Ask for financial statements and seek independent, unbiased advice to properly evaluate the company. If a company refuses to provide you with such information, be suspicious of what they're trying to hide.
5. Don't believe the hype. It is not uncommon for penny stocks companies to pay dealers or brokers to contact you and hype up their stock. Be careful of companies that constantly promote their brand without providing details on how it plans to increase revenue.
And beware of stock promoters who call or email you about potential gains without supplying you with sufficient information. Fraudsters use boiler rooms, emails, and internet bulletin boards and chat rooms to spread exaggerated, and sometimes false, information.
Always remember that the key to a successful stocks investment is research. Do your homework by gathering as much company data as possible. Information on penny stocks companies are usually hard to locate, so it's up to you to dig it up.
Penny stocks are a high-risk investment gamble when it comes to stock trading. They are cheap to purchase, but the chances of hitting the jackpot are usually slim.
Author Resource:-
Nir Dotan is a writer and promoter of
Penny Stocks services, and
Penny Stocks Preferred source for the latest news and information on the best and brightest Small Cap Stocks.
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