How to Prevent Yourself from Pitfalls with Penny Stocks

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All companies have to start somewhere. Some of the biggest businesses in the world were once trading
in the stock markets as penny stocks, with virtually no history in their target market, and nothing but a
dream for success in the future. The people who are lucky enough to bet on these companies when
they’re still in penny stock status can make some serious cash on their investments over time.
Unfortunately, it’s difficult to separate the true winners in the penny stocks market from all the frauds,
scams and bad choices that are available to invest in every day.
The Dangers of Penny Stocks
The important thing to remember about penny stocks as that any kind of stock comes with its own share
of risks and potential rewards. Investing in a standard stock won’t mean that you’re definitely going to
end up with a huge win on your hands, just as investing in a penny stock won’t ensure that you fall
victim to a scam. The key to success is knowing how to evaluate the potential risk that you’re exposing
yourself to with each investment. Penny stocks are naturally a lot riskier than standard stocks, simply
because they’re highly-volatile shares, with very little information available to let you know whether the
business with thrive, or fail. Fortunately, just because penny stocks are risky doesn’t mean that you can’t
make money with them. All you need to do, is have an investing plan.
Protecting yourself with Penny Stocks
While it’s true that investors who don’t know how to protect themselves with penny stocks can end up
getting burned, you can reduce your risk factors by following these pointers:
 Avoid any dangerous markets: Stay away from the Pink sheets and OTC markets and choose
penny stocks exclusively traded in places like the AMEX, and NASDAQ.
 Don’t buy based on tips: Never invest in any stock based on a “rumor” or tip you held
somewhere. Always do your own research before you put your cash at risk.
 Never follow free stock choices: Avoid making investments based on the stock choices of free
emails and newsletters. Most of these publications deliberately attempt to trick people into
investing in dangerous stocks so that they can make more money.
 Check financial positions before you invest: Make sure that you get an insight into the quality of
the company before you invest. Make decisions based on balance sheets and financial
predictions, not a “great story” or a unique business concept.
Just like with any investment, the more you know about your penny stock investment, the better your
chances of making a good decision. Look for penny stock companies that have a growing share in an
expanding market that you feel comfortable with. What’s more, make sure that any penny stocks you
invest in have a high volume of trades going in and out each day. High volumes ensure that the stock is
liquid enough that you should be able to get rid of your shares if the value of the company begins to fall.

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