Penny stocks, worth the Pound?

Penny stocks are low-cost shares which trade in the market for less than a dollar (in the United States these are known as penny shares). These may be referred to as microcap stocks. These are typically shares of small companies. Given their nature, these are very speculative and are considered to be high risk investments. However, the potential for profits is enormous, if traded carefully. These stocks are usually traded on the OTC, Pink Sheets and some other institutions.

These stocks are attractive because they allow the investor to buy large quantities of stocks at relatively low prices. Then if lady luck smiles and if there is a bump in the prices, a good profit can be made by selling these shares. It is advisable to watch the market and formulate a strategy to optimize profits. Given the fickle nature of penny markets, a blunder can cost the person his entire investment. When beginning to invest in penny stocks, ensure that a huge quantity is never invested. Always invest in small increments and make sure that the money is pulled out if it looks like the stock is being promoted. If this is happening, an imminent crash in the stock value is to be expected.

When it comes to penny stocks, the biggest problem is that there will always be plenty of rumors floating around. Advertisements doling out false information by the dozens, plenty of misinformation ridden newsletters and the likes will be doing the rounds and it is up to the investor to make informed choices. Often, somebody will buy a large quantity of some share or the other and spread the hype about it in order to make the share prices shoot up and offload their own quota while it lasts. This is a typical trick used to make money in the stock market.

Microcap stocks are very thinly traded. This is mainly because of their low liquidity. The thin volumes mean that, in many instances the stocks are pumped and dumped. The interest in the stocks is artificially inflated leading to good gains during the advertisements and once this is over the returns are next to zero. This is what has been precisely described in the previous paragraph. Pumping and dumping is a type of fraud that occurs in many microcap stocks.

The reality of such stock trading is a rather grim tale. One should never trade on stocks that have no volume (this basically means that nobody is interested in them). As the stocks are not listed on any of the major exchanges, the investor’s interests are not protected by the Securities Exchange Committee (S.E.C.). The ground reality of this stock market is a cut throat world where investors without sound money management principles and shrewd decision making will lose all their money at one go.

Penny stocks are very dangerous investments for an amateur. Ensuring adherence to the basics of stock trading and stock markets should keep one in good stead. Never risk investing huge capitals in penny stocks as they have a tendency to backfire. Also, it would be very wise not to follow online bulletins or emails as these can often be misleading.