Many people have heard of the term penny stocks. It can be used to denote stocks that have a value of less than 1 dollar a share or it can be used to denote stocks that are not exchanged in regular stock markets such as the New York Stock Exchange or NASDAQ. Although, many people are under the misconception that investing in Penny Stocks can be lucrative, in reality they can be considered as a sure way to lose money.
There are many disadvantages to these so called penny stocks. It is important for you understand these disadvantages, so that you will not be lured falsely by these types of stocks.
- Perhaps the greatest disadvantage is the fact that these penny stock companies are not regulated by the SEC (Securities and Exchange Commission). Since these penny stocks are not regulated in the classic stock exchange markets, they do not have to report their assets, report their change of administration and scores of other vital information that is necessary for investors to help decide about a company’s future. Since, these companies exchange through over the counter services, in most cases they can be considered as a black hole since only negligible information will come through about them.
- The second major disadvantage of penny stocks is the fact that they can have a very thin margin of exchange. This means that when you are looking for a way to sell your penny stock; you might not be able to find a buyer at its current price. The reason for this stems from the fact that there are usually very low volumes of exchange for many penny stocks. Hence, when you need your cash and thus when you try to exit these stocks; you might not be able to find a buyer who is willing to buy at the current price. You may have to lower your price considerably, so that you can sell your stocks and get your cash.
- Since these companies are not regulated; then if the company is about to go bankrupt, you wont have a warning about it and more importantly you wont have any rights concerning this investment. In the worst case scenario, you will have to take your chances on these penny stock companies.
- You have a high chance of picking a wrong penny stock due to the fact that they will have a lack of history. Hence, you will not have away to do a proper analysis.
- You can be a victim of a biased recommendation as most of these penny stock companies will try to influence the investors by using different channels of the media and especially the Internet. In the Internet, you can receive falsely constructed information about a particular penny stock, but in reality you will be losing money since the information will not be true. Since, these stocks are not regulated by SEC, you won’t be protected by the Government and thus you can be misinformed.
- Normal stock brokers are forbidden to solicit penny stocks due to these disadvantages.
