Three Reasons to Steer Clear of Penny Stocks

Everywhere you look on line or in investment newsletters, you will definitely find many proponents of penny stocks. Penny stock newsletters and penny stock tips are all over the place. The sales pitches tell us of potential gains and point to past successes as evidence that penny stocks are the place to go. The truth is penny stocks are very dangerous for the average investor, and getting sucked into the penny stock mania that runs rampant through advertising pitches can be a slippery slope. As a financial professional and someone who has seen many people lose a ton of money on penny stock picks, I want to take the time to warn you of why you should probably stay away.

Three Reasons to Steer Clear of Penny Stocks

1. Penny Stocks are Easily Manipulated and Scams are Common- Penny stocks are often extremely thinly traded, meaning very few market participants are trading them, which makes them perfect targets for a scammer. Penny stock newsletters that promise the next big thing are extremely common, and they are full of dangerous information. These newsletters are sent out for one reason, for the person or firm who produced them to make a profit off of you. They understand that penny stocks are easy to manipulate, so all they have to do is send out this newsletter to many individuals and have them purchase the stock. Right when you are purchasing the stock, they are selling out and making a mint. It sure doesn't seem right to me, but it happens frequently.

2. No Transparency or Rules- I am a big backer of individual investors doing their homework on stocks before making the purchase. The problem is, this simply isn't possible with penny stocks. There are no rules or regulations for companies that trade on the pink sheets or over the counter. Financial information is typically impossible to come by, which means you are investing on pure speculation. Investing on pure speculation is not something you want to make a habit of doing. Transparency in finance protects investors, and there is no transparency here.

3. Huge Gains are the Exception- Of course there are times when a penny stock turns into a huge money maker, but these occurrences are quite rare. The penny stock tips and penny stock picks will always talk about the amazing potential of these stocks, but it really is your job as an investor to constantly be aware of the risks as well. When you are dealing with penny stocks, the potential risks are huge. Penny stocks are generally cheap for a reason, and many of these companies go bankrupt within a few years. Don't believe the hype that penny stocks often make people filthy rich!

A prudent individual investor would be wise to stay away from some risky stocks. Penny stocks may seem great on the surface, but when you dig deeper you'll find a great deal of troubling realities.