What Makes Penny Stocks Such a Dangerous Investment ...

Penny stocks are all over the internet. Almost any financial news or investing website has banners of men in business suits smiling with the text, ?1000% returns on penny stocks.? They all push their newsletter and hope you are swept off your feet at the chance to get rich. But penny stocks often make terrible investments.

Cheap prices make penny stocks so attractive to young investors. We are encouraged to buy shares in stocks on the S&P 500 but they often cost $20-50 a share. Buying just a few shares does not give us much of an investment. Plus the trading cost from an online brokerage eats up any gains we might have.

Penny stocks often trade at less than a dollar and many are true to that definition, trading at mere penny?s per share. One can own thousands or tens of thousands of shares of a penny stock compared to just a few shares of a company like Walmart or General Electric.

However, the risk of investing in penny stocks is written in the price. There is a reason a stock sells for a penny and not $600 a share or more like Apple. It comes down to quality, growth, earnings, etc. Blue chip companies often sell for a given price because they deserve to. The same is true of penny stocks. The price of just a few penny?s tells you the company has failed or is failing.

What?s worse is that the price might be indicative of a completely bogus company. Many young investors are hit hard when they are given a hot penny stock pick only later to find out after the stock went to zero that the company does not even exist. This is mostly the fault of fraudulent penny stock newsletters. Their goal is simple; drive interest in a penny stock, then when you buy, they sell. They pocket the money and you sit on a junk penny stock.

Daytraders, often confused as investors will trade penny stocks throughout the day selling within mere minutes of buying. This is dangerous because they rely on technical analysis and charts more than fundamental analysis which at least tells you the penny stock is junk. If their candlestick charts were right, you would reap the rewards all the time, but you won?t! Forget day trading in penny stocks, because even if you were lucky a few times the commissions, which are often more expensive than regular stocks will eat away at your returns.

Penny stocks are a very dangerous investment. They are best avoided at all costs. If you must invest in them, do so responsibly. Use money that you can afford to lose and would have spent on something as vital as lottery tickets. If you decide to entertain the thrill of day trading penny stocks, consider a service like MidasLetter or Penny Stock Psychic.

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