Penny stocks are highly volatile with the potential for great reward as well as a great loss. There is an incredible risk being taken when investing in penny stocks.
This is one of the reasons many investment brokerages don’t offer penny stocks, especially for beginners looking for anyone who explains how to buy shares effectively without overwhelming them. But, while a lot of care of caution should be taken when investing in penny stocks, if done right the returns can be great.
As enticing as penny stocks may seem, before investing be sure to know what a penny stock is, why they are so risky, and how they can yield incredible returns.
Penny Stocks
A penny stock is technically any stock that is sold for under a dollar. However, because of inflation the SEC now classifies any stock trading for under $5 a share as a penny stock.
Most penny stocks are either heading for bankruptcy or are over-leveraged. These are what makes them so risky. A company’s shares almost magically become worthless overnight when the company files for bankruptcy. Investors lose a lot of money on penny stocks belonging to companies who don’t rally and fail.
It should also be noted that penny stocks are not usually traded on the major markets (NYSE, NASDAQ) but instead are traded on pink sheets and OTCBB. This makes it difficult to find a brokerage firm that will trade in penny stocks. And those that are willing to usually will charge an extra fee for it.
However, hiring a well educated, experienced, and reputable broker in penny stocks is your best bet for buying the best penny stocks today. Educating yourself on investing in penny stocks will help to choose a broker and avoid scams.
Penny Stock Scams
Chances are if you’re thinking about investing in penny stocks you’ve probably seen the movie Wolf of Wall Street. What Leonardo Dicaprio’s character did in that movie is what you want to avoid when investing in penny stocks.
There are a few types of scam is to be really aware of and to avoid. These scams are the kind that runs off with thousands of your dollars, never to be heard from again.
Pump-and-Dump Scheme
Unfortunately, this scheme is the most common and the easiest to fall for. The scheme involves finding inexperienced investors to invest in an obscure penny stock. When investors begin buying shares they begin pumping up the price of those shares.
Once the shares reach a certain price, the scammers sell all their shares at a high return. However, by selling all their shares, they dump the price of the shares back down. Leaving investors without anything to include their initial and subsequent investments.
The Short-and-Distort
This scam is the opposite of the pump-and-dump. In this scheme, scammers borrow shares. They sell the shares at a much higher price. The hope being that the price of the shares will drop after being sold, allowing the scammer to buy the shares much cheaper and return them to the client. The scammer netting a profit.
The problem herein lies within the drop in the price of the shares. There is no real way to guarantee that the price will drop that much. Unless the scammer spread damaging and false rumors about a company to drive down the stock.
Once again the inexperienced investor is left holding the bag with a useless stock in it, and out all the money they invested.
The Best Way to Invest
As mentioned be sure to choose an investment brokerage firm to help you properly invest in the best penny stocks today. However, keep in mind some of these brokers are scammers in disguise. Not all hope is lost.
Ask the tough questions of your broker. How much experience do they have trading penny stocks? How long have they been around? Conduct your own research into the brokers and the penny stock companies.
Educate yourself more thoroughly on penny stocks trading and investing. While actively trading does require a lot of experience and expertise, knowing what goes into penny stocks can help you to avoid scammers.
Know what to look out for in certain scams, like when prices are being artificially inflated or when a company is experiencing bad press surrounding price drops. You may not be able to catch the scammers in the act, but you will hopefully avoid losing all your money.
