The Personal Finance Resource

What Everyone Should Know About Penny Stocks

To the beginner’s eye, the stock market can be a big, scary entity. We see the progress of the stock market on all the major news networks, generally scrolling across the bottom of the screen, with all these code names and percentages and numbers. To the untrained eye, this can be nothing short of intimidating.

But for those of us willing to look past the intimidation and take our first baby steps into the world of investing, the best idea is to start of small and invest in penny stocks.

Penny stocks are stocks typically under the five dollar mark. These stocks are usually for companies that are in the early stages of creating and building up their company, not much unlike us beginner investors. These are a great resource for beginning investors, or investors on a limited budget, to get integrated into the stock market.

While they may be inexpensive, penny stocks carry a certain risk. The important thing to do before investing even a penny in a company is to do your research. Make sure the company is legitimate, and making efforts to grow. Also join email blast lists so you can receive up-to-date information about the latest stocks and what to be wary of.

The biggest and most common risk from investing in penny stocks is getting into a pump and dump scam. Pumping and dumping is a type of fraud in which a company buys a substantial amount of penny stocks, then promotes their company as the “next big thing” to investors to get them interested in investing. At the point that thousands of investors have put their money into those stocks, the company will sell off its share, making thousands or even millions, and leaving the other investors’ money to go down the drain. While it is illegal, it isn’t as easy to catch as with other, larger scale stocks that are more closely monitored.

If you are interested in investing in a penny stock, but do not know whether it is a pump and dump scheme, look for these signs. Pay attention to growth patterns in a company; if a relatively new company has suddenly skyrocketed, that is a major red flag. A big giveaway of a pump and dump is an unheard-of technology company boasts a revolutionary new product. A great precautionary measure is to stick to companies whose stocks are registered with the Securities Exchange Commission, as any unregistered are a major risk of loss.

At any level of expertise, investing carries a risk. Just by doing your research and staying up to date with all the latest stock news, you can minimize your risk significantly. Just remember to invest only what you are comfortable risking, and always keep an emergency fund. The stock market is never 100% predictable, but after slowly integrating yourself into that environment, you will soon find success in investing with so little.

Post by: Taylor Wilson

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