There are plenty of reasons why you should not invest in penny stocks, and many of them are pretty darn compelling. Equally many boil down to nothing more than opinion, whether founded in fact or unfounded, and still others are just plain glib. We think that penny stock investing can be the right move for so many investors that we?re willing to provide you with a host of reasons why you should not invest, so that you can judge for yourself whether the generally-stated factors of concern really are factors that apply to you, and we?re fairly certain that you?ll agree that while some of these issues may indeed apply to you, others will not. Our goal is to provide you with a balanced view of the arguments on both sides of the equation.
The most commonly stated reasons for avoiding any investment in penny stocks center around the supposed inherent riskiness of small-cap equities. Those who espouse this pessimistic attitude point to the often illiquid nature of penny stocks, making it difficult for investors to recoup their capital should they decide to sell their positions, since there are few buyers for the shares; in addition, these same pundits typically stress that because the OTC markets have less stringent listing requirements, this equates to less oversight, making penny stocks more susceptible to unscrupulous manipulation on the part of stock promoters and other potential public company fraudsters.
While it is true that penny stocks may be more likely to be the focus of a pump and dump or similar fraudulent scheme than large-cap issues might be, it is by no means true that all penny stocks are fraudulent offerings. In truth, any stock can be risky, or manipulated, regardless of its capitalization?think Enron, for example?and the key to minimizing your risk when investing in penny stocks is simply to ensure that you?ve got the chops to perform the right kind of research necessary to discern between the winners and the losers, and to actively use your research skills to conduct the most thorough level of due diligence your skill level can support.
If you have no knowledge of how to read a balance sheet, an income statement and a cash flow statement, if you have no experience in understanding and knowing how to interpret the information contained in the standard package of public company filings, if you have no analytical skills that will assist you in the reading and interpretation of stock charts, and if you are not familiar with at least the most basic and fundamental indicators, then you should not invest in penny stocks.
If, however, you do possess the necessary skills, or are capable of learning them, then don?t discard the notion of investing in penny stocks out-of-hand. Instead, put those skills to good use, so that you don?t miss out on the opportunities that only penny stock investing can offer. Look for companies with proven business models that offer products or services which the general public wants or needs, or, alternatively,? for companies actively engaged? in growth industries with products, patents or technologies in the pipeline that promise value and gains. Of such firms, try to identify those that enjoy a higher trading volume; 100,000 shares per day is a good volume for a small-cap issuer, but a daily volume of 50,000 shares is also decent. If, in addition, the stock is priced not at .05 cents per share, but rather at .50, you?ve pretty much mitigated the illiquidity argument. If you then expand your research to also focus on stocks meeting this criteria which manage to generate a healthy cash flow and net profit margin, then you?ve gone far toward eliminating any arguments about the speculative nature of small-cap stocks, and further, if the firms you?ve identified have also displayed some degree of compliance with public company reporting requirements, whether in remaining current in all (or most) of their SEC filings or whether in providing sufficient transparency and disclosure to be included for listing on the more prestigious of the Over The Counter exchanges (such as the OTCQB and the OTCQX), then there?s no reason to doubt the legitimacy of the issuing company as a contender for public market investor monies.
To make sure that your small-cap stock issuing company research is adequately well-rounded, be certain that you also spend some time looking into company management. You?ll be looking for a degree of experience confirming that senior management is thoroughly grounded in the industry, in the public arena, or, ideally, in both, and thus possesses the necessary core competencies to guide the company toward higher growth and increased earnings. You?ll also need to double-check that no member of senior management has any red flags in their professional past and has never been the subject of an SEC enforcement action. A positive outcome from this level of research will serve to mitigate some of the standard concern that management would knowingly partake in, or otherwise condone, any type of fraudulent activity or manipulation of share price in violation of their fiduciary responsibility to shareholders.
We?ve demonstrated that there are indeed sound strategies for countering the standard negative notions commonly associated with penny stock trading. If you can research, plan and strategize your way through the types of steps listed above, then you might be well-positioned to buck the trend and indeed invest in penny stocks with success. To that end, there?s a few more things you should keep in mind in order to further reduce your chances of loss. Never trade in large positions, which can backfire to your detriment: limit your trades to under 10% of average daily traded volume and you?ll limit the chance that you?ll get stuck holding the bag if things turn south. Control your risk further by diversifying your purchases such that you?re not too heavily invested in any one firm or industry. Sell your shares when they?re up 20-30%, avoiding the urge to hang on for an even higher return: in penny stocks, greed is not good. Measure gains in terms of percentages, not absolute dollars. Perhaps most importantly of all, approach your penny stock trading activities in a businesslike manner, being careful to remain unemotional at all times, and remember that it?s not statistically possible that all of your picks will turn out to be winners; there will always be some percentage of losses. The beauty of buying penny stocks is that thanks to the low share prices, your losses are easy to limit, even if they?re not easy to control. After all, if you can maximize your rewards by limiting your risk, isn?t that what investing?s all about?
If you?re not interested in gaining extensive knowledge of the dynamics and workings of the markets, with good potential for high percentage gains while risking only a small amount of capital to buy-in and honing your research skills, then by all means, do not invest in penny stocks. In order to get the best research available on penny stocks, sign up for our newsletter at www.pennystocks123.com.
Source: http://www.pennystocks123.com/stock-advisory/why-should-i-not-invest-in-penny-stocks.html
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