Talk to most people and ask them about the OTCBB markets, and you’ll likely get either a story about someone who made it big or someone who lost it all. Like Las Vegas, investors can always tell you a story. The question for you is simple: is this a place to invest your hard-earned money.
The answer is yes and no. The key is in recognizing the risk involved. Keep risk to a minimum by identifying which penny stocks have potential, and which is a trap, and you may find yourself in the staring role of one of those stories about the guy who made it big. If you fail to take heed of the warning signs, you’ll find your money, hopes and dreams fade just as quickly as gamblers in Las Vegas.
The very fact that penny stocks trade at such low volumes increases the risks involved in investing in them. The recommends potential investors in penny stocks to be aware of the fact that the low trading volume of these stocks makes it likely that in times of needs buyers will be rare if not impossible to find. Finding accurate quotes for prices is also difficult which increases the possibility of the investor losing his entire investment.
Despite the risks involved, micro cap stocks are often attractive investments to investors for various reasons. If you are new to investing and looking for the chance to return a high yield for a relatively low investment you are likely to come across some penny stocks. It’s not surprising that investors are attracted to penny stocks. A move of a few hundreds of a penny can mean big returns for you. For a $0.10 stock to move up 20% requires a move of only $0.02. If the stock moves to $0.20, you have doubled your money. If the stock starts to move, you can double or triple your money within days. You won’t find that kind of return on the major stock exchanges.
the price of penny stocks can drop just as drastically and equally fast. Those who are inexperienced investors would do well to avoid penny stocks until they have a better understanding of how things work. It is also important to note that because of the relatively low ‘worth’ of the companies that are often listed on the OTC they are often considered questionable investments. Stocks that are listed on the Pink Sheets do not have to follow the same stringent reporting to shareholders that securities on the major exchanges have to follow. Some of these companies have such a limited financial history that no accurate determination of their actual value can be made. Many of these companies are either very new or dangerously close to bankruptcy.
There is also a strong potential for fraud with some buyers artificially ‘enhancing’ or driving the costs by buying large amounts of shares and raising the perceived value of essentially worthless stocks. Most investors who fall for this lose many when it comes time to sell.
A common definition for micro cap stocks is any stock that trades below $5.00 per share.
Penny stocks are not for everyone. Consider speaking to a financial advisor to see if trading penny stocks fit in with your risk tolerance.
Before you decide to avoid penny stocks, remember, that not all of them are ripe for fraud and manipulation. Many companies seek to expand the growth of their business by seeking out investors who are willing to fund that growth, in exchange for shares in future success. Many of these companies will find themselves in OTC listing and move onto larger exchanges.
Decreasing your risk is easy. Take the time to learn about the companies you are looking to invest in. If they know how to make money, you are buying a growing company. If you are looking at buying an idea, you may find your shares are not worth the paper they are written on. You need to be careful.
By: Christopher Smith
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