Risks in Penny Stock Investments

Posted on August 26, 2009 by Penny Stock Trading

Penny stocks: There is always a risk factor associated with every stock, however being traded at few counters, the penny stocks are little more risky. The risk factor increases if you avoid some precautions that are necessary.

Risks: The investment in penny stocks is highly risky due to various factors. Some of the common risks are as given below.

- There is no reliable and authentic information available for penny stocks. Whatever the information comes to us that comes either through stockbrokers or through the agents of companies offering penny stocks. The seller or broker who sells the penny stocks might get money from the company for selling the shares and therefore can mislead the investor. It is therefore necessary for the investor to carry out the detailed research before investing in penny stocks.

- It is sometimes difficult to find the buyer of specific penny stocks you have purchased from the broker even the same broker may not be interested to repurchase the stocks from you.

-Sometimes the companies having no financial asset or no financial history comes in the market and collect money from investors and therefore before investing in penny stocks, you should study the company offering the penny stocks. You should study the prospectus of the company very carefully and should see whether the share prices of the stocks are justified. Some of the dealers sometime inflate the stock prices fraudulently.

- You should know your broker, as he is the main person to whom you are dealing. Ask about him from some of the other dealers and customers. You should seek complete market information from your broker including the difference in bid and sale prices of the stocks. Ask him to provide his suggestions in writing and seek a second opinion about the recommendations he made.

- You should know the nature of the stock on offer. Many times the initial public offers are more risky than other. You should invest your money after satisfying yourself from the various factors including the financial conditions and assets of the company. Sometimes you may lose a majority of your investment or your entire investment in a specific penny stocks if a careful and wise decision is not made.

- Before making an investment in a specific penny stock, you may ask about your broker’s history including any disciplinary action taken against him or her from NASD. You can also seek additional information about your broker from your state office of SEC (Securities and Exchange Commission). If still you think that you have become a victim of fraud, our federal law has provisions of rights and remedies available to you. You can file a complaint at the Securities and Exchange Commission.

Summary: Although investment in every stock is risky, even then taking some precautionary steps you can avoid risk in penny stock up to a great extent. One of the major precautionary steps is avoid hurry and do thorough research before investing in penny stocks.

Penny Stocks: What Are Penny Stocks?

Posted on August 19, 2009 by Penny Stock Trading

If you’d like to get started in the stock market, many brokers may suggest you start with penny stocks. For several reasons, penny stocks are considered “easier” to buy than many other types of stock. But in order to buy penny stocks, you need to know what they are.

So, what are they? Very simply, penny stocks are low-priced shares of companies. These stocks trade very infrequently, which is why they’re considered good for beginners, but this makes it very hard to ever sell your penny stocks. In some cases, you may end up just getting “stuck” with the penny stock you buy because it proves impossible to trade. This is why some people say buying penny stocks are a risk.

They are a rather controversial type of stock, but on a small enough scale that controversy is rarely heated. When you invest in penny stocks, it’s important to prepare yourself for the fact that you may lose your total investment because you never get the opportunity to trade away your penny stocks. Maybe penny stocks trade over-the-counter, when they do trade at all.

Another thing that sets penny stocks apart is that they don’t trade in the mainstream stock markets (NYSE, NASDAQ, or AMEX). They also usually have market caps at $500 million. But when things go well with penny stocks, investors can buy them cheaply and profit from them quickly. The trick to doing this is in knowing a lot about penny stocks, and knowing how to work with them. This may be a trait that comes from trading experience.

Before you decide to put your money into penny stocks, know that they are considered to be “high-risk investments.” This means there is a lot of potential to lose your money with penny stocks, too. If you’re a bit of a gambler at heart, you may enjoy working with penny stocks. This is one reason why some are drawn to penny stocks – the excitement of it and the potential risk. There is a chance to make a huge profit, as well, so many are willing to take the chance on penny stocks in hopes of a large return.

Once you know what they are, you can look into learning more about specific penny stocks that are available for purchase. It’s a good idea to do research on any stock, and on any kind of stock, before investing your money. After all, the stock market can be very risky and you have the potential of losing. Make sure you don’t lose something that you can’t stand to live without. This way, you’ll be sure not to regret your investment. Whether putting your money into penny stocks or some other type of stock, take the time to do your research first. This will help you make an informed, educated decision. This is the best way to invest your money – by thinking and planning ahead, so you know that you’re going to do something that you’re pleased with.

Penny Stocks Risks

Posted on August 18, 2009 by Penny Stock Trading

The first point to remember is that large market cap stocks are likely to be registered on a national stock exchange such as NASDAQ. The reason for this is that when large volumes and amount are involved, which by definition is true for a large market cap stock, it is extremely difficult to get all that trade done outside a stock exchange. Although it is theoretically possible for a large stock to be traded on Pink Sheets and OTCBB, it will be difficult to sustain high volumes on these, because many people, who trade on recognized stock exchanges, may not trade in these stocks, particularly in large volumes.

Registration with a stock exchange involves a number of formalities that have to be complied with. These formalities are aimed at making the whole process more transparent so that the investor has access to relevant information. The availability of information helps you to verify the facts and also to check out on the soundness of the company more thoroughly. When these are missing you are operating under insufficient information and therefore are exposed to higher risk. Thus stock exchange registration by itself reduces the risk involved in investment.

Apart from this, there are other reasons why a penny stock is more risky than large market cap stocks.

Stocks registered with a recognized stock exchange are required to maintain minimum standards. These include requirements such as

Minimum number of publicly traded shares – this should be 1.1 million shares in the case of NASDAQ. The publicly held shares should also be a minimum of 10% of the total shares of the company.
Minimum Shareholder Equity
Minimum Operating income
Availability of market makers
The specified minimum amount should be available in assets, total revenue and listed securities.

There are many such requirements that a company has to meet in order to stay registered with the stock exchange. Basically, these requirements ensure that the stocks are widely held, and the company is running properly. These safeguards make the listed stocks less risky than unlisted ones, which do not have to follow any such requirements.

Penny stocks also generally do not have a history behind them, and suffer from low liquidity position. They have less room to maneuver. Because they are more risky and less preferred they will also have difficulty in raising money for new ventures or expansion. In some cases they may have difficulty in raising money even for operations. Companies generally raise money by borrowing or raising new capital. The amount that can be borrowed is limited for a given equity base. Suppose the company has $100,000 in capital, lenders may be willing to lend $200,000 or some such amount. If the company wants to borrow more money, it will have to first increase its capital base. This is more difficult in the case of penny stocks.

Finally, it might not be equally easy to find buyers in the case of penny stocks particularly if you have a large number of them. This will affect your own liquidity in the short term and also make it difficult to offload these stocks if the going is not too good.

These are some of the reasons why a penny stock is considered more risky. However, penny stocks have their brighter side too. They can give you much higher returns. We’ll see how this is possible in the next article.