pennies.jpgA penny stock is a low-priced, speculative security of a very small company which usually trades outside of the major exchanges like the NYSE, NASDAQ or AMEX in the US. The penny stocks are sometimes referred to as microcap due to the fact that their market capitalization is very small. The stock price is usually low, let’s say less than $5.

When it comes to high-risk investment options, penny stocks ranks near the top as some of the highest risks you will find in investment circles. Of course, they also offer some of the highest yield of any other stocks as well because the prices start so low and the sky is literally the limit.

Some of the common risks associated with penny stocks may not be risks one would commonly assume are related to the stock market. The thing you need to remember is that trading penny stocks isn’t regulated in the manner that the major stock exchanges are regulated. This means that a large safety net that others in the stock market are protected, to some degree, by does not extend into the murky waters of penny stock trading. It is the forgotten child of oversight and investors are left to fend for themselves.

The first risk is fraud and this risk seems to be rampant in the penny stock market. You will find all kinds of fraudulent penny stocks that are heavily marketed by overseas companies that look glossy and legitimate on the Internet, in investment magazines, and through many brochures, and even several carefully crafted and well written press releases, newsletters, and emails. The problem is that there is no product or the demand is deceptively overrated and the stocks are essentially junk stocks worth nothing, if they exist at all. The “businesses” in question take the money, dump, and run never to be heard from again. Unfortunately this is quite common and many of the “companies” that perpetrate the frauds are located overseas. This is the biggest risk though certainly not the only risk

The other risk is that the companies that are listing penny stocks are often smaller businesses that are building or larger businesses that have fallen off the major exchanges radar for one reason or another and are either going through desperate restructuring or failing all together. Both pose very real risks but if you choose to put your faith in the right new business or old business that is getting its act together the proper way you can find amazing profits on the other end of the roller coaster ride.

The other risks that are involved when trading penny stocks are the lack of financial reporting and the possibility of fraud.

Pump and dump schemes, involving use of false or misleading statements to hype stocks, which are “dumped” on the public at inflated prices. Such schemes involve telemarketing and Internet fraud. Remember the movie with Ben Affleck called the Boiler Room?

There is no accountability and very little public information. This means you have to really dig to find out credible information about the companies you are considering and are left going with your gut more often than not rather than relying on legitimate information that will be beneficial in your investment decisions.

Penny stocks are very lucrative to those who manage to pull off the investments and come out ahead. There are few instances in which there is little profit with the lion’s share of these investments yielding substantial profits for investors. Personally, I would stay away from such risky investments. It’s just not worth it.

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