5 Reasons I Stay Away From Penny Stocks

Because of their cheap price and the ability to grab up so many shares for a small amount of capital, penny stocks have long been a favorite for both new and active traders alike.

While active traders have their reasons for venturing into penny stocks, most new traders know nothing more than being able to buy a lot of shares for not so much.

The term “penny stocks” is a loose term referenced by many; however, I look at true penny stocks as stocks that are under $1. The idea is that these stocks are so low, that they just have to go up, but, in most, cases is there a reason why these stocks are not worth much?

Personally, I am not fan of penny stocks and here are 5 reasons why…

1. Extremely volatile

Active traders like penny stocks because they can move up and down really quick, which obviously makes for a good trade; however, to a new trader this type of condition would almost certainly lead to a string of bad trades and a bad sense of the market overall.

2. Spam and Scams

While I’m sure there are quality penny stocks out there that have the ability to bust out, most of them are usually pawns in a pump and dump scheme: companies pay promoters to pump the stock higher. Eventually these stocks do come crashing down, and so do the accounts of everybody along for the ride. What are stock promoters?

3. Bad Fundamentals, Bad Business

Sometimes the idea could be good and the actual product could be a game changer, but the management just doesn’t know what to do. With penny stocks come more opportunities for the company to just collapse and go away. Obviously if that happens you lose everything.

4. Is it Volatile or is Dead?

I stated earlier that many new traders flock to penny stocks for its cheap price, but it doesn’t matter how cheap the stock is if that stock doesn’t move. While penny stocks can be volatile, they can also be the complete opposite and not move at all… which leads to the next point.

5. Must Do Your Homework

Because of all the above factors just using one type of analysis such as technical can make it difficult to accurately time these type of stocks. In order to truly be successful, you must know the ins and outs of the company. What do they do? How much cash are they dealing with? Are they picking up debt? What is needed for them to finally break out? The questions go on and on, and if you don’t know the answers then it will be hard timing these penny stocks.

So you can see why I’m always hesitant to deal with penny stocks. If you’re not looking to track your stocks like a hawk, then consider looking at other type of stocks to trade.