What are the Misconceptions about Investing in Penny Stocks?

You have probably heard of the term penny stocks. In broker’s terms, any stock that has lees than a one dollar value per share is considered as a penny stock.  In SEC (Securities and Exchange Commission) terms, any stock that has a value of less than 5 dollars per share and also which is not exchanged on the major exchanges (like NYSE or NASDAQ) is called a penny stock.  These types of stocks are traded over the counter and they are listed in exchange boards such as the Pink Sheets or in the OTCBB.

While, many people would think that investing in a penny stock would be advantageous, in fact it is very disadvantageous to invest in penny stocks.  Many people feel that they can make a better investment with smaller amounts of money and they also hope that they will be able to increment their savings pretty fast.  The reason for this belief stems from the prices.  The price of a penny stock is usually less than a dollar.  Moreover, these stock share values are usually in the range of 10 cents to 50 cents a share. (Sometimes they are even lower than 10 cents a share)

This means that for example if you have a 20 cent share and if that share gains 5 cents in its value, this will mean that you have made a 25% gain in your stock value.  Hence, if you have invested ten thousand US dollars, then this will mean that you will make 2500 dollars in a day or two.  Or on the other hand, if you have invested around $100,000 this will mean that you can make around $25,000.  Hence, it is the lure of this easy money that makes people to go and invest in penny stocks.  Of course, you can just as easily end up losing 25% to 50% of your savings in a huge downturn of your penny stock shares.

Another misconception about penny stocks is the fact that many people think that many major companies have climbed up the ladder through penny stocks.  Hence, people hope to gain money by investing in that company’s future.  They compare this opportunity to investing in Microsoft’s younger self.  These investors hope to find a company that is promising to boom up and make a lot of money.  Hence, many investors have the wrong idea that investing in a penny stock will allow them huge returns for their savings.

In reality, penny stocks are a sure and a fast way to lose money. Due to the fact that these companies are not SEC regulated, they can be fraudulent in their reports to the public.  In majority of cases, they don’t even report to the public as they are not under obligation to do so.  Also, in majority of the cases, these companies are in the negative side of the financial spectrum and you can end up losing huge amounts of money.