Most people are attracted to penny stocks because of their low price, and often see them as an easy get-rich-quick option.
What they don’t realize is that penny stocks are more like a gamble than an investment, and more often than not, people who invest in penny stocks lose all their money.
If that isn’t enough to convince you, here are 6 reasons why you should ABSOLUTELY avoid investing in penny stocks.
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1. Penny Stocks are Very Illiquid
Usually, fewer shares of penny stocks are available for trading compared to regular stocks at any given point in time, since there are fewer investors interested in buying and selling them.
This means you cannot easily trade them. So even if the price goes up, you might not be able to sell the stocks and cash out.
2. Penny Stocks are Often Riddled with Fraud
Since penny stocks cost very little, and the number of shares available for trading is low, it is very easy to manipulate their prices.
A common scam is a pump and dump scheme, where a small group of scam artists buy shares in a penny stock and create buzz around it, encouraging unsuspecting investors to buy these stocks, thus driving up the price.
The scam artists then sell their stocks at a profit, causing the stock prices to plummet, and leaving other investors with a worthless security.
3. Penny Stocks are Very Volatile
Prices of penny stocks can rapidly go up or down, and by a lot.
While these drastic price fluctuations can present opportunities for short term gain, they can also result in significant losses that happen really quickly.
4. Penny Stocks are Difficult to Evaluate
Unlike stocks listed on major stock exchanges, penny stocks are not required to disclose their financial statements.
So it is nearly impossible to find the income, profit, P/E ratio, and other important fundamentals of penny stocks. This makes it very difficult to analyze them.
So even if a penny stock is near bankruptcy, you probably wouldn’t know about it!
5. Penny Stock Companies Have Unproven Business Models
Penny stocks are usually stocks of very small companies, which are just starting out and don’t have an established track record. This makes it impossible to gauge what their future will look like.
Even if things go well, it can take a long time for the companies to be profitable and for you to make money as an investor.
6. Penny Stocks Have High Trading Costs
The trading fees charged by brokerages are the same whether you buy a regular stock or a penny stock.
If you buy 100 shares of $0.10 stock and the brokerage fee is $5 per trade, you are essentially paying a 50% brokerage fee.
Some brokerages also charge additional fees for stocks that trade below a certain price. All this makes the trading costs a huge percentage of your penny stock investment!
I hope you liked the video. Please share it with your family and friends so they can also avoid the mistake of investing in penny stocks!
And thanks for watching!
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Podcast: 6 Reasons Why You Should Avoid Investing in Penny Stocks
Fun, informative and concise episodes by a 10-year old, breaking down complex financial concepts in a way that kids and beginners can understand. Episodes cover personal finance topics like saving, investing, banking, credit cards, insurance, real estate, mortgage, retirement planning, 401k, stocks, bonds, income tax, and more, and are in the form of a conversation between a cowboy (a finance novice) and his friend, a stock broker. Making finance your friend, only at Easy Peasy Finance.
A little bit about me: I have been fascinated with the world of personal finance since I was 6! I love to read personal finance books, and keep myself updated on the latest by reading various personal finance magazines. My friends often ask me questions about finance because they find it complex and intimidating. That’s what inspired me to start my YouTube channel called Easy Peasy Finance when I was 8, and this podcast 2 years later.
Here are top 6 reasons why you should avoid penny stocks.
Show notes and transcript at: https://www.easypeasyfinance.com/6-reasons-to-avoid-penny-stocks/