How Much Risk is Involved in Penny Stocks?

Penny stocks got their nickname because of their trivial share value and lack of respect in mainstream investing. By definition, penny stocks are not just those stocks that are valued at one cent. Rather, they may be worth a few dollars per share. Like anything that costs a penny or two, you may get what you pay for when it comes to these little stocks.

While some big name stocks were once considered penny stocks and have grown in value since, it’s not necessarily the case with the majority of penny stocks. “Everything in moderation” is applicable here: you don’t want to load your portfolio down with penny stocks. Because they are sort of “fringe” stocks, they aren’t scrutinized as well, and we’ve all seen what happens when there isn’t serious oversight on Wall Street.

If you have a gut instinct about certain penny stocks, go ahead and invest, but otherwise you should proceed with caution. You can’t always be certain who is creating the buzz for these stocks and what their motivation is, yet you have no way to verify the information because of the lack of data on penny stock companies. When it comes to investing, if it sounds too good to be true, you know that it is.

A lot of the information about penny stocks may be issued to mislead potential investors for purposes of inflating the share price. While all of this is unethical and illegal, it has happened. In a free market economy, buyer beware is the most apt stock tip of all. Even with penny stocks, you must do your homework.

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