Risks in Buying Penny Stock

Investing in equities, stocks and other investments always poses some risks for investors. In fact, nearly all shares traded in the stock market involve the risk of negative profits. But most investors still put their money in shares for the promise of higher returns on their initial investment. Investing penny stocks is the same. It entices investors to buy a large number of volume hoping that its undervalued price will appreciate sometime in the future. A Penny stock also has the possibility to go lower with its volatile market movements. There are many risks as well as positive reasons to invest in penny stocks. This article will help shed some light on avoiding risks in penny stocks.

Try to avoid listening to unverified tips and rumors about hot penny stocks. This is an all-common scenario where new traders and speculating investors buy volumes of shares that promises to rise today or tomorrow. Whenever you hear this type of news, try not to listen, as these are just scams and schemes by boiler room operations. Most of these operators will try to use psychology of the market to get your money. There are yearly cases where investors got scammed by listening to advices and most resulted to loss investments.

Penny stocks can be found in different exchange markets. Regulated markets such as the NASDQ Small Cap and the AMEX or The American Exchange are the best places to look for safe penny stocks. Investors must stay away from unregulated markets that do not have sufficient compliance and other financial report requirements. Most companies in these exchanges are unreliable in terms of annual performance and most stocks bought cannot be sold again. Over The Counter or OTC and Pink sheets should be avoided if possible. One factor that also makes penny stock investing risky is the volatile trading activity. The movement is usually unpredictable and erratic. Stocks that are purchased can take awhile before it traded to buyers. This is liability for you investments portfolio.

Before you buy any shares, you have to know the background of the company, what their business model is, their management, their operations and most of all, their financial statements. By reviewing all of their information, this will give you an idea on whether or not you should invest your money or not. It also best to seek professional help in analyzing financial data and seek out hidden discrepancies that the company may be hiding. Be detailed and thorough in your research and analysis. There will also be companies that may use highlights to show their past and present achievements to let you know their background. Some may be hype and some may be true.

In crediting this kind of stocks, it still does have the promise of profiting a lot by a up trends in the past. Some penny stocks in the past have gradually moved up from their class and eventually became blue-chip stocks. For example, Microsoft and Dell. These two companies started with their shares as penny stocks. Most good stocks started as penny stocks. So weighing the pros and cons is all you need to do.

Penny stocks make a good addition to your portfolio and to upgrade the value investments over time. There are many risks when in trading penny stocks, so having a solid background on fundamentals will really help your trading. Make sure to keep yourself updated with financial tips and newsletters to know how penny stocks are doing in the overall scheme of the stock market. Penny stocks may be cheap, but with the right pick, and with a little bit of patience on research, you might end up with the winner eventually.