PostHeaderIcon Risks of Investing in Penny Stock

Every investment has a risk involved. The only difference is the level of risks that the investors are willing to take. On the part of penny stocks, the risks involved might be higher. Of course, penny stocks might have that lure of getting big money from an investment worth cents, but this might be another case of "easier said than done".

Penny stocks can be so attractive to some investors, especially the beginners, in that they are cheaper to have. With prices of each share going at under $5, who wouldn’t want to have some in the portfolio?

Penny stocks allow some investors to dish out investments in more affordable amounts and sometimes get hold of quite a variety of different penny stocks for quite a small amount of investment. Not only that, penny stocks may also offer a bigger potential for growth to some investors. This potential for growth can translate to bigger profits if the investors chance upon a booming penny stock right from the start. Although quite an attractive idea, this opportunity might not be quite a common as one would think.

As stated above, all investments come with risks. In the case of penny stocks, the risk may be impressively higher. One reason is that most penny stocks come from newly-established companies. These companies may not have the benefit of having a good track record going for them. Such companies still have a lot to prove in order to be considered worthy. And before they can do that they might need some investor money. This might prove to be a risky proposition on the part of the investor, putting some money on an unproven company that may or may not deliver the goods.

Another risk that penny stocks pose on the investor is the usual liquidation limitations. Some penny stocks out there are just very difficult to sell since most of such stocks usually have fewer "stockholders" and shares sell at low volumes. At times, shares may not be on the trading block at all which provides investors with limited liquidation opportunities. This might even undermine their chances of selling their shares at the right time because of low demand and low share volume.

The risk that penny stock investors may also find themselves in is fraud. Unlike listed stocks on the NASDAQ or NYSE, penny stocks require minimal listing requirements when they are being listed in the OTC Bulletin Board, the usual listings for penny stocks. Companies offering penny stock shares are also not required to provide financial reports or change of share ownership to any regulatory body. This makes penny stocks more open for cunning con artists to fraud investors out of their money.

With all these risks, it is no wonder that most financial investment experts try to stay away from dealing in penny stocks. For them, the risks are much higher than the potential return on investment. But this does not mean that investing in penny stocks is bad. The only difference is that investors would be more likely to find themselves in a riskier situation than trying to invest in stable and more reliable stock shares on the major stock markets. Eventually, it would be up to the investor if investing on penny stocks is all worth the risk that they come with.


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