On Avoiding Penny Stocks

One of the worst things you can do as a trader is invest in penny stocks. These are stocks that are typically below a dollar. There are many solid reasons that you shouldn’t invest in these stocks that we will address.

Avoiding Penny Stocks

Are Penny Stocks a Scam?

Many penny stocks are fine companies, but some of them may be a fraud or a scam. These stocks aren’t worth investing in because the company isn’t proven yet. They aren’t listed on the NASDAQ or NYSE. If you want to make money, you need to invest in solid proven companies and these are found on the major exchanges. There are plenty of scams and fraud which is rampant in penny stocks because speculators can drive up the price of penny stocks quickly and then short them just as quickly which drives the price to the bottom and you lose money just as quickly as you invested it.

No Value

Penny stocks are essentially worthless. These companies just don’t make enough money to drive the price of the stock up. If you keep an eye on penny stocks you can see if there’s any real movement in the share price. You have to pay attention to what the company is doing and if they are in fact, making money. The problem is that many penny stocks just stay penny stocks and never increase in value at all. Good companies that hit penny stock territory need to be avoided as this indicates financial difficulty or even bankruptcy. Always look at the value of a company before you invest.

Speculation, Not Investing

When you invest, typically you’re investing in solid, proven companies with a great track record. These are companies have been around for a while and make money. When companies make money, you make money as an investor. In penny stocks there’s too much speculation. There’s nothing that backs the company up. A penny stock is very volatile. It may go up a few cents one day and crash back several more cents the next day. There’s no steady increase, it’s up and down all the time.

Easy Manipulation

These stocks are often pumped up to an inflated price since the low price means you can buy plenty of shares. These stocks then trade at way more than they are actually worth. People will buy the stock thinking it’s going up in value, but in reality it’s just being pumped by a few savvy stock traders or day traders. Once these traders make money, they quickly sell the stock which causes it to plummet in value and the normal trader loses money because they panic sell. Once the stock hits a bottom, the traders start over again and pump the stock back up. This is referred to a pump and dump. The stock gets pumped up in value then dumped for a quick profit. This is rampant in penny stocks, but not seen in real stocks with value because it’s impossible to do this in a solid company.

You should avoid penny stocks. You can make a bit of money, but at the same time lose it all very quickly. Invest in proven companies on the NASDAQ and NYSE. You’ll make more profit and many also offer dividends which pay you for investing in the stock. Penny stocks are more headache than they are worth as there’s fraud, scams, and little money to be made.

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