6 Reasons You Should Absolutely Avoid Investing in Penny Stocks

6 Reasons You Should Absolutely Avoid Penny Stocks: Easy Peasy Finance for Kids and Beginners

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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.

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!

Conclusion

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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Download Transcript: Ideal for Use by Teachers in their Lesson Plan to Teach Kids and Teens

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Podcast: 6 Reasons Why You Should Avoid Investing in Penny Stocks