The 3 Reasons Why You Should Not Trade Penny Stocks
Penny stocks is the new hot thing. Since the major markets crashed in late 2008, smart investors had to venture into new territory to find good trading opportunities. The days of being safe in the major markets came to a crashing end and companies that we all though will never fold, got wiped out – even after millions of dollars of government funding to try and save them. Two years ago most traders would have laughed at the mere thought of trading penny stock, but in the current economic climate it’s become a real opportunity.
The stocks are different. If you try and trade them using your normal trading strategies you might end up burning your fingers. Trading them successfully can be a bit of a steep learning curve, but in the end the rewards may just be worth it.
There are 3 main reasons why a penny stock is not an ideal investment. Let’s briefly look at the 3 main reasons why you should not trade them:
1. Penny stocks are stocks of speculative companies
With stock prices between 10 cents and two dollars, the main aim of these companies is to get venture capital. They have great ideas and big dreams, but they need investment to realize their ideas and products. Unfortunately, like many entrepreneurs their dreams can be too big for their abilities and they often fold even before their companies start doing business.
2. Penny stock companies have no revenue and no profit
Because these companies are mostly start up ventures, most of them are note even doing business yet. Without products they probably don’t have any real fundamentals to look at. A lack of company information can mean a very risky trade and if you haven’t got any fundamental analysis in place, picking these stocks can be a bit of a blind man’s game with dire consequences.
3. Penny stock companies are often ahead of their time
Penny stock companies are often companies with some sort of advanced technology that’s not yet in the mainstream. Chances are that they could not get sufficient funding via conventional means simply because their product is something completely new. A good example of this was back in the dot com boom of the late 1990′s when a lot of internet technologies was born from “wacky ideas”. This made a lot of traders and entrepreneurs very wealthy – even though the whole bubble burst soon after. Sometimes these technologies never come off the ground – leaving you out of your investment and your money.
Nevertheless, penny stocks can be a great way to make money trading. Despite the risks, the opportunities are huge and with a little education and some persistence you can make returns unlike anything you will ever get on the major markets with overpriced stocks. The key is to learn the ins and outs of trading these stocks and to trade them well and with caution. Follow the rules and eliminate as much risk as possible. In the end trading penny stocks still offer a great opportunity and with very little capital you can make some great returns.
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