Money & Investing – Banks.com

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Many people enjoy trading penny stocks. This is because these stocks — which can be followed on OTCBB — often make large changes in short periods of time. Because these stocks are available for a very little, it is possible to buy up large amounts of shares, and then wait for a change. And because changes of 10% to 30% are common intraday, if penny stock traders hit it right, it is possible to make a lot of money in a very short amount of time. The flip side, of course, is that it is also possible to lose a lot of money in a short amount of time.

Penny stocks aren’t really my preference; I’m a long-term, boring investor. I don’t crave immediate returns. However, for day traders who like a spicy investing life, penny stocks can be a fun way to trade. But there are definite pitfalls. Stock Trading To Go offers some points of caution when trading penny stocks:

1. Manipulation of Prices – Penny stocks are extremely easy to manipulate the price in due to the low average volume of shares traded per day (see #4) and low prices. This makes penny stocks prime candidates for a pump and dump type of scheme. Very often on message boards, in emails, newsletters, etc. pumping (or promotion) of a penny stock can be seen to attract investor capital. Once the stock jumps in price the pumper sells out completely leaving the rest of the investors on their own.
2. Unregulated exchanges – Penny stocks that trade over the counter on the OTCBB or as pink sheets are not regulated and thus are not forced to meet any specific compliance rules or requirements. This adds unseen risks for any penny stock trader buying a long term position as these securities are exposed to more and different types of manipulation and scams.
3. Lack of financial statements – When you hear of a hot stock the first thing a wise investor will normally do is to go and check out the financial statements of the company. Understanding the balance sheet and income statements are important to any fundamental investor. Unfortunately with most penny stocks there are absolutely no financials to observe which means there is no hard data to analyze beyond what is offered by other investors.
4. Lack of liquidity – While not the case with all penny stocks, many aren’t very liquid. Some companies may only see $10,000 – $50,000 in stock exchanged per day. This makes attaining competitive prices very difficult and for larger investors selling positions even more difficult.

Again, remember that penny stocks are very risky: You could easily lose quite a lot of you are not careful — and lucky.

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.