Hey, we all want to save money and there is nothing wrong with that.
And if you can save money and invest those earnings you've just compounded a wise decision upon a wise decision.
However, there are numerous traps can fall into when investing.
One of the more dangerous traps investors fall prey to is the penny stock. The trap from this type of stock is its extremely low share price.
This extremely inexpensive stock often tricks investors into thinking they're getting a great deal.
The truth couldn’t be more different.
When you invest your hard-earned money in seemingly “dirt-cheap” penny stocks your bank account us at extreme risk.
Why shouldn’t you touch penny stocks with a ten-foot pole?
Read on for five reasons to leave these deceiving stocks alone.
You Can Invest In Penny Stocks But Can You Sell Them?
Penny stocks are typically small-market capitalization companies, with very high volatility, and poor liquidity.
But just because a stock has a small market cap and tends to be volatile doesn't mean the deck is stacked against the investor.
However, there is the question of liquidity. The lack of liquidity is the most frustrating aspect of penny stocks for investors.
What happens is that investors may take a price reduction to find a willing buyer. The thought that you can buy and sell quickly to catch returns isn’t entirely true.
Penny Stocks Attract Scammers
Has an email every shown up in your inbox promising a penny stock that will make you millions? Ever get a “royal” individual asking you for a short-term loan, promising 10 percent of his family's misfortune in exchange for the “loan”?
Penny stocks are the feeding grounds for today’s financial hucksters. The penny stock market is heavily manipulated. You could argue that it exists primarily to separate unsuspecting investors from their hard-earned savings.
A lot of the internet boards that you find talking about penny stocks may seem to have hot tips or great recommendations. But in reality, these are designed to lure unsuspecting and eager investors into thinking they have found the next great tech company.
In reality, many of these companies those tips are recommending are in financial trouble or have unrealistic business plans without any meaningful revenue or earnings.
Penny Stocks Have Little Or No Transparency
Prominent financial media outlets meticulously document developments in companies represented in the Dow Jones industrial average.
On the other hand in the penny stock game, some dude with the screen name HotStkTips25 provides updates about a company on some random internet forum.
Penny stocks trade in an over-the-counter market. Reporting requirements for penny stocks are minimal. Since the market has a wild-west nature, it can be exceptionally hard to find reliable information about them.
Penny Stock Speculation Doesn’t Square With Returns
Do you like to get a return on your investments?
If you like to see returns on your investments, then putting money in penny stocks is an endeavor that will at the very least disappoint and most likely fail.
If you decide to trade penny stocks, you should do so with your play money. Also, understand that you need to exceed the costs of buying and selling before ever getting any sort of return.
Penny stocks can be fun so if you do decide to trade in them, think of it as recreational trading.
Let me state this loud and clear – penny stock investing is not the sort of investing you would do with your retirement nest egg.
While it’s not true that all penny stocks are worthless investments this isn't always true.
Just like everything in life, every now and then some schmoe will score an incredible rally and earn early investors some epic returns, but as in the Hunger Games, the odds are not in your favor.
You're betting against the house – and the house always wins. There is always a story about the down on his luck construction worker that wins a $10 million lotto jackpot.
But what about the bodies of all those players who lost their ticket cost for that one big payout. Well, financial reporters never write big success articles about the losers never or give them a spot on the evening news.
When you invest in Penny stocks its like you are betting on a long shot at a horse track. The reason the track assigns long odds to that horse is because it’s not a very good runner.
And for every long shot at the track that somehow pulls off a miracle there are tons more that don’t.
Stay Away From Penny Stocks
You are better off investing in a diversified basket of well-capitalized, proven businesses instead of playing the odds on a long shot stock that you read about on the internet.
If you stick to members of the Standard & Poor's 500 index, for instance your odds of getting a return improve dramatically. If you stick to the Standard & Poor's 500 you are not guaranteed a big return or a return at all. This is your trade-off against investing blindly on hype and hope.
If you have even fallen prey to the predatory penny stock game and managed to come out somewhat intact consider yourself blessed by the gods.
Give thanks and never touch penny stocks again.