Penny stock trading attracts many people who want to make money in the stock market. Their small price offers a possibility to buy several hundreds or thousands of shares, and many people think this is the best way to make money trading in the stock market. They think they can make a lot of money in a single trade.
Bu it’s just the opposite. Trading penny stocks is one of the most risky types of stock trading, especially for beginners. Many wanna-be stock traders start trading them and take huge losses and never return to the stock market again.
Why are penny stocks so attractive
The low price of these stocks is what attracts people. The typical penny stock price is below 1 USD. Recently, the U.S. Securities and Exchange Commission defined that every stock below the 5 USD is a penny stock. Check the example below.
But most people still trade stocks that cost below 1 USD, preferably only slightly above zero. They start trading with just a few dollars, like 500 USD. They think they can earn a huge amount of money by trading penny stocks with only a small investment. But that’s wrong. It isn’t possible to make a regular trading income if you start with only a few dollars in your account.
Trading penny stock is more like gambling. These traders put all their money into a “hot pick” and wait to see whether the price will rise and they can make a huge gain. It’s just like a casino. To make money regularly by trading stocks, you need a totally different approach.
Risks of penny stock trading
Penny stocks are much riskier trading instruments than regular stocks. They’re traded on the OTC BB or Pink sheet markets. These markets do not require similar information disclosure like stocks traded on the NYSE or Nasdaq exchanges.
Actually, the biggest problem with penny stocks is that typical investment funds, hedge funds and similar investment companies generally do not trade these stocks. Penny stocks are mostly traded by small private investors and traders. There are many cheaters who try to manipulate stock price development.
The basic manipulation of a stock price is a pump and dump technique. A cheater publicly promotes a single penny stock name on different trading forums and in discussion groups. He also sends a lot of spam email that offers such stock picks as a profitable opportunity.
The price jumps up based on these promotions only to evaporate several days later. Many traders also avoid selling these shares at a loss so they convert into buy and hold (and hope) investors. They hope the price will rise again sometime in the future, and they can sell their shares.
Penny stocks yes or no
There’s so much risk in penny stock trading that you should avoid it. Trading of penny stocks is too much like gambling. There’s much less risk in trading regular stock market stocks that you can find on the NYSE or Nasdaq.
If you want to create regular income from trading, then leave penny stocks behind. Learn real stock trading strategies that can generate regular profits.
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