Two Cents on Penny Stocks

Who doesn’t want to make a quick buck? What investor would shy away from potentially gigantic returns on investment? The get-rich-quick scheme has taken shape in the form of penny stock investing over the past decade. Dozens of companies and websites broadcast stock picks that can theoretically yield triple- and even quadruple- digit returns have captured the public’s eye for quite some time now. And with the continual rise in internet usage, the allure of investing in penny stocks can hit you from all angles. Many unknowing investors blindly invest thousands of dollars with the intention of making a killing, all from some website or newsletter they’ve stumbled upon. Investors must be leery of scams in which stock-pickers tout penny stocks to potential investors, only to dump all their shares on the upswing: resulting in widespread losses for the naïve investor. The fundamental principle is to do your own homework and not blindly follow any stock picks or investment ideas without adequate research and analysis.

Penny stocks have always carried debatable parameters. Some maintain that a penny stock is a stock whose share price trades for less than $5.00; this is the literal SEC definition. However, the widely accepted criteria for penny stock classification include a share price of under $1.00 (and as low as fractions of one cent) along with small market capitalization and minimal regulatory standards. Penny stocks typically do not meet the requirements of major financial exchanges and thus are forced to trade on an over the counter (OTC) market. A lack of financial transparency, trade volume, and liquidity for penny stocks creates a Wild West landscape for stock investors: the quintessential high risk, high reward scenario. Low share prices rope in incognizant investors who are looking to leverage their money to make out like bandits. But just as the popular proverb states: if you can’t spot the sucker at the table, it’s probably you. Thousands of investors fall victim to penny stock scams where online companies and websites pump out stock picks whose shares end up getting crushed by the advisors themselves. Just recently the SEC tracked down the fraudulent penny stock-picking firm Penny Stock Chasers, finding them responsible for touting cheap stocks to investors before selling their own shares for handsome profits. This scheme- which is highly illegal- is not uncommon and can go widely undetected in the often lawless realm of OTC trading.

What makes matters complicated for advantageous investors is the difficulty in detecting unscrupulous and illegal activity in the stock-picking business. Unlawful companies like Penny Stock Chasers often appear legitimate by posting impressive returns and producing comprehensive websites and newsletters. Many penny stock-picking firms even have active facebook and twitter accounts. One cannot become giddy from observing double and triple digit gains, because often times the stock-picker’s profits are at the expense of the investors that heed to those exact stock picks.

Because of the lack of regulation for over the counter derivatives and penny stocks, it becomes critically important to be proactive about your own research. Often times the penny stocks whose share price has shot up is due to wide bid-ask spreads and illiquid trade volume. Get yourself in the know by utilizing one of the numerous online brokerage sites that offer free research and analysis. Investors usually must sign up to an online brokerage in order to trade OTC derivatives anyways. Read about the best online brokerages to choose from at:

http://investmentsoftware.com/category/online-brokerage-reviews/

You can also look into numerous investment software applications at: http://investmentsoftware.com/category/investment-software-reviews/

No matter where you get your information, make sure to abstain from blindly following the stock picks of online companies and newsletters. There are usually breathtaking returns that can pique serious interest, but be leery of investing scams for illiquid stocks whose shares could tumble with a one-time massive sell order. The underlying tenet is that penny stocks are often unpredictable. Although they can yield high returns, there is a large risk factor involved and only experienced or well-educated investors should take part in this type of trading.