Are Penny Stocks Appropriate Investments Sep02

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Are Penny Stocks Appropriate Investments

It’s not unusual to see a stack of ads touting how lucrative penny stock investing may be for some individual investors. As I was researching the Internet to write this article, I came across outrageous profit claims; these claims were far in excess of the very best year on the New York Stock Exchange. It sounds great! Who doesn’t want to make a wad of money?

Before you dump your life savings in this market though, there are some important facts of which you should be aware.

Are Penny Stocks Appropriate Investments? 5 areas to consider…

Are Penny Stocks Appropriate Investments1. You can easily become a victim of an overly biased recommendation as many of these stocks are hyped by specialized firms who make their business by pumping low priced stocks up. These firms use a variety of mediums to accomplish their task, including newsletters, the Internet, and various media outlets. As a veteran of the stock industry, I can tell you that most of these firms are paid in shares of the stock they are pumping. Quite simply, they have a vested interest in pushing the price of the stock higher regardless of the merit of the individual stock.

2. Speaking of the merit of the individual stock, one of the greatest disadvantages of these stocks is the complete lack of transparency in company reporting. The vast majority of penny stocks are not regulated by the Securities and Exchange Commission. This means the stock companies do not have to submit audited reports of their assets, changes in overall cash position, and a variety of other reports that regulated firms are required to submit on a quarterly basis. Short of and physically visiting the firm, there are a few methods for verifying information about these stocks.

3. Another major issue in the penny stock at market is liquidity. Some stocks are very thin and it is difficult to exit at a specified price. Additionally, there can be a very wide bid and ask spread to contend with. The reason for the wide bid and ask is varied, but it is not unusual for one small investment bank to be on both sides of the spread. This can cause a major problem for investors has competition to narrow the bid and ask spread is zero.

4. Since these stocks are not subject to reporting requirements they are often in financial straits and are not required to disclose this fact to potential investors. Depending upon which source you choose to believe, as many as 7/10 penny stock companies are bankrupt within three years. Of course, penny stocks usually have limited assets. As an investor you will probably get very little in the event of the companies liquidation.

5. Since most that penny stocks have a very short history and there is no financial transparency in their reporting requirements, it can be very difficult to pick the proper stock. Most penny stocks are bought on recommendations from either honest purveyors of penny stock information, or from “pump and dump” firms who are hired to create a media blitz for the penny stock.

There is a considerable amount of money made in the penny stock market, though most of it is not made by investors. For the above reasons, it can be very difficult to make a living in this treacherous environment. On the other hand, if an investor could find a honest purveyor of penny stock information, one who has experience and access to quality information, I would imagine that you could make a considerable amount of money in this market. Of course, there seem to be many obstacles to success in the penny stock business, which is why it enjoys a less than stellar reputation among professional investors, who typically avoid this section of the market like the plague.

But as I have said, under near-perfect conditions there is money to be made in the penny stock business. If only the problems of financial transparency, company history, and then markets could be overcome by knowing or hiring a true expert in the penny stock arena. To me, it would appear to be a difficult arena in which to compete.