Risks Associated With Penny Stocks

Penny stocks are a different means of investment that is slowly beginning to become popular. Initially, very few people were familiar with the concept of penny stocks, however, given how there are people who are now earning up to millions of dollars like Timothy Sykes thanks to penny stocks, more people want in on it. Now, a lot of people make the mistake of assuming that penny stocks involve trades and investments under just a $1, however, according to the official definition, penny stocks happen to involve all trade which is under $5.

Since you can invest with such a small amount of money, people are able to invest more easily, and because most small businesses have sudden hikes that can go up to double or triple the amount, you are able to earn a lot of money quickly. However, there are risks associated with penny stocks and it is important that you know about them before you go ahead and make your investment.

  • Fraud is really common when it comes to penny stocks. One example of which is promoters suddenly hike up interest in a lesser known stock, which causes a lot of rookie investors to buy up majority shares, and once said stock has reached a certain limit or set point, the promotor ends up suddenly dumping or selling the stock, leaving its investors high and dry.
  • Private companies sometimes end up merging with a public company on its own, also termed as a reverse merger, and because of this they are able to inflate their stock prices, and even falsify their earnings.
  • Since penny stocks happen to involve investing in smaller, lesser known businesses, the market is highly volatile, and because of this, it is really easy for things to suddenly take a turn for the worse.