What Are The Risks of A Penny Stock Trade
By | February 9, 2010
Any penny stock trade you make is a bit of a gamble. The penny market is a very volatile environment where the value of individual stocks can change very quickly and with little warning. This means that the risks of investing in penny stocks is far greater than when investing in more traditional stocks. There are several reasons why penny stocks move more quickly, and it’s important to know the reasons why in order to make wise decisions about where and how to invest your money.
The main reason why penny stock trading is more risky than traditional trades is that the penny stock market is far less regulated than the secure exchanges like NASDAQ. Without the requirement to adhere to certain rules and regulations that the traditional exchanges provide, there is a greater potential for deceit and illegal activity. While some penny stocks do trade on the major exchanges, it is the ones that do not that are riskier.
When considering penny stock trades, you have to take into account the practice of the pump and dump. What happens here is that shady individuals and groups will attempt to drive up the price of a stock through manipulative means, and then sell all their shares, leaving others with the now worthless stock. Typically, this occurs by posting false information about supposedly hot penny stocks, encouraging those who know little about the financial market to invest in certain stocks, and spreading false details about different companies through spam, penny stock newsletter publications and various message boards. Once the stock has been pumped up artificially, these people will sell their shares at a substantial profit and cease all promotion of the stock, resulting in the drop of the stock price.
Every penny stock trade you make can either make money for you, or lose money for you. There is far less room for error when dealing with these types of stocks, and so you need to invest your time along with your money. This means constant and consistent monitoring of your stocks and how they are performing, as well as checking out what is going on in the rest of the market and in relevant industries that may have an impact on your shares. This involves a considerable amount of time at the computer. If you can’t dedicate this time, then you will not be a successful penny stock trader.
Making a penny stock trade that results in a gain in your investment is not an easy thing to do on a consistent basis. You really need to be able to spend time watching the market and frequently doing a penny stock analysis, in order to monitor your investments to time your trades right. You also need to be able to sift through all the fraudulent stocks so that you don’t get burned by someone taking advantage of the lack of rules that typically surround penny stocks. Minimize your risks so you can maximize your gains.
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