The Challenges Facing Investors when Purchasing Penny Stocks

When investors look for a way to invest as little money as possible in order to get tremendous returns, many investors gravitate towards Penny Stocks. These types of stocks are typically quite affordable. While some may actually go for pennies a share, most of the stocks trade at slightly under five dollars per share. Regardless, from a initial investment standpoint, these stocks are quite appealing. However, investors need not be fooled by low prices, as these stocks also carry with them a number of challenges. As challenging as a penny stock is, the opportunity for tremendous returns on investment is what keeps bringing investors coming back.

The first thing to understand is that a penny stock isn’t often traded on traditional stock market indices. An investor will have a hard time finding these stocks being traded on the Dow Jones or the NASDAQ. These stocks are typically traded on indices such as Pink Sheets and OTC markets. While this in an of itself isn’t a significant problem, the markets these stocks are traded on can create challenges.

Penny stock trading markets don’t often require a great deal of reporting when it comes to the stocks that are available to be bought and sold. This means that there could be a number of different question marks in terms of the company that is offering up the penny stock. Sometimes, companies that trade their stocks on these markets may not be viable companies, or they may not even have products or services. For this reason, investors will have to do even more research in order to validate a company whose stock they are considering purchasing. This isn’t impossible, it simply means extra work.

Another thing to consider is that the stocks are subject to wild shifts in volatility. A stock can skyrocket in value in then plummet well below its buying price in a very short period of time. This makes the timing of buying and selling these stocks extremely difficult.

Even with the challenges, penny stocks are a tremendous investment with the possibility of tremendous returns. However, with their lack of reporting and their susceptibility to volatility, the stocks can represent a significant risk when it comes to investing. Fortunately, when these stocks pay off, they can pay off tremendously, which is why they should be a serious investing consideration.