Posted on 01 May 2012.
Investing in penny stocks for beginners can be the way to make huge, sudden profits that are seldom found in other stock investments. On the other hand, there are many ways to lose your investment that are not as common in more prosaic stock picks.
• The first area of concern when dealing with penny stocks is the relative lack of objective information. These stocks are not subject to the same level of regulatory scrutiny as is required of larger firms. Brokerage houses seldom do any coverage of the stock’s prospects or pitfalls until right before a penny stock is ready to make a breakout into respectability. As a result, much of the information available about penny stocks is being generated exclusively by the current owners of the stock.
• The next worry is that penny stocks sometimes move not on the basis of their own prospects but instead rise or fall as a free rider associated with a hot stock market segment. People sometimes assume, for example, that money flowing into a hot sector such as oil exploration or precious metals mining can be thrown at any stock that has even the vaguest connection to the sector.
• The real risk in playing penny stocks, however, is that buying them is very easy, and selling them can sometimes be impossible, no matter what the apparent profit may be. Investors can find themselves locked into a stock that shows paper profits, which are unrealizable because there are no buyers on the market, only sellers.
One way to test if a stock is worthy is to buy a small amount of it and attempt to trade it before betting heavily involved. If selling is a problem, then pass it by. The real key to investing in penny stocks for beginners is to make sure that there are multiple credible sources of information on the stock, and the stock show plenty of market activity every day of the week.
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