Buying Penny Stocks – Background and Precautions

Considering buying Penny Stocks? The dream of many speculative investors is buying into an investment on the ground floor at pennies per share and riding out a wave of momentum until it crests to then sell it for a handsome profit. Inspired by stories of people who profited by this stock trading strategy, these people find their way to the alluring, yet infamous, penny stocks.

Penny stocks are generally just low-priced stocks trading off the major exchanges on the Over the Counter Bulletin Board (OTCBB) and on Pink Sheets. The Securities and Exchange Commission (SEC) considers any stock trading under $5 to be a penny stock. The benefits of buying penny stocks are usually of a speculative nature though some of them are well-managed companies that possess a good potential for future growth.

Equities on the OTCBB are required to file timely financial reports with the SEC. This makes them as easy to run through a financial analysis as most any other company listed on one of the major exchanges, but typically there are a number of factors make buying low-priced stocks risky investments besides just having financial reports readily available.

Companies trading on the Pink Sheets aren’t required to file financial statements with the SEC. This makes a performing a comprehensive financial analysis difficult or near impossible at times. Many of these companies lack track records of consistent good performance or no past records at all. This can be due to things such as: being newly formed or to poor management that has led so to some serious financial problems.

Buying low-priced stocks on the OTCBB and on Pink Sheets could potentially be opening a door to brokers exhibiting questionable or even fraudulent behavior (even more so than stocks trading on major exchanges). The initial public offering (IPO) of a penny stock could be due to the efforts of a fast talking broker trying to get the most money that he can from interested investors. Also, a company could be near worthless and is being dumped on the public by the owners.

The Internet is fraught with mass emails, newsletters and message boards from firms and brokers trying to let the recipient in on the most recent “hot stock” secret that’s going to return 250%, 500%, or even 1000% if they buy in quickly. These are usually penny stocks that could be on the threshold of infamy if it isn’t already there. The broker could be ready to pull out at the first opportunity they get. These are just some of the reasons why an investor should be cautious when considering including these stocks in their stock trading strategy.

Penny stock companies can vary greatly from very visibly structured companies to more loosely organized one-man operations. The same can be said for the amount of information available for the public to be evaluating them. This makes finding investment gems to include in your stock trading strategy difficult. Investors should do quite a bit of investigative homework to acquire enough knowledge and confidence before considering buying penny stocks.

Source by Larry Both

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