Why You Should not Buy Penny Stocks

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Penny stocks are believed to be an easy get-rich strategy for the novice as well as some of the experienced investors. The companies in the market are either the blue chip companies or the small ones. The blue chip companies run established, successful and steady businesses. But the smaller companies are found to appeal more to the investors due to their probability of striking a massive, incredible fortune. The negative reasons that influence the investors to purchase penny stocks are:

The stock is cheap and will appreciate faster - People tend to stay away from buying the 'high priced' stocks of the larger or the blue chip companies thinking that they possess limited scope for appreciation and the steady returns are not appealing enough. The prospect of zoom is more alluring. So, they feel that if they own a good amount of these penny stocks, they will stand a brighter prospect.

But the reality is that the absolute value of the share price does not have any impact on the investors return in the ultimate count. Earlier, when the stocks were not dematerialized, there existed minimum lot sizes for the buying of stocks and this held them outside the reach of the small investors. So, a good understanding of the financial market is essential prior to making an investment decision.

The penny stocks face the maximum price manipulation - The pumping and the dumping policy are rampant here. The promoters of these small cap companies usually collide with the brokers and pump up the stock prices by indulging in massive publicity stunts and issue announcements. This attracts the attention of the investors. As a result of the hype when the desired number of the penny stocks is sold, they finally dump it on the retail investors. Therefore, it is not wise to simply rely on the broker's advice.

The attractive brochures of the profit registered - These are often cooked up details to lure the investors, while in reality, these small companies have registered years of losses. The investors must learn to differentiate between the genuine and the fake. But the investor does not stand the option to validate any of this information since they seldom have the resources to do it. They again rely on them and the brokerage firms.

These When penny stocks get stuck in the LOWER ring of the market circuit, it is Difficult to Liquidate them, for exit , and the door is shut tightly before the realization dawns. So, success in such investment is alluring and difficult to afford.

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Source by Omar L. Caban