What are the Risks of Trading Penny Stocks?

You will hear about all kinds of risks that are taken when playing the stock market game. There are high-risk stocks and investments along with many low risk mutual funds and everything in between. When it comes to high-risk investment options, penny stocks often top the charts 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. Do not get stars in your eyes however when considering penny stocks as investments because there are many that have gone before you into that type of investment and relatively few that have come back from the brink as wealthy men and women.

Of course reason is rarely a good bedfellow for ambition or dreams and the low prices of most penny stocks it’s perfectly acceptable for even the common man to have a few dreams of his own when it comes to obtaining wealth by playing the stock market game and there is a much greater thrill with penny stocks than you will find in any casino with penny slots.

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. Corporations and companies that trade in the major stock exchanges are required to release their financial information and account to their stockholders. The same doesn’t hold true for penny stocks. 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.