Some experts say that the best way to earn money in the stock markets is to invest penny stocks. Broadly it is a good idea because if you buy penny stocks then you will get higher returns within two or three quarters.
But if we look deep inside it then it is not absolutely true because it contains many hidden issues which can make your whole investment a troubled issue.
Many people believe that it is quite easy to predict the movement in the value of penny stock, but reality is far from it. The time taken for the movement in prices of these stocks is so short, that there is hardly any room to make any valid projection.
As the cost of each of these penny stocks is quite low, people generally buy a good chunk of it and invest substantial amount. As such, huge amount of investment either decreases or increases in value with a small change in their prices.
Penny stocks trading is fraught with higher degree of risk than its counterpart traditional trade, as there is none to control the trading activities of these penny stocks.
Traditional trades are highly scrutinized and monitored by exchanges like NASDAQ, there is not much chance of manipulation in their prices and of illegal activities. As majority of trades in penny stocks take place outside these secure exchanges, there is high chance of fraudulent, manipulative and illegal activities. However, risk is quite lower for those penny stocks which trade in secured exchanges.
One important thing to consider when purchasing penny stocks is the pump and dump. This is an unethical practice in which individuals employ various means to artificially inflate the price of a stock, and then quickly sell off all their shares, leaving unwitting investors stuck with the now worthless stock. Read More