Are Penny Stocks Too Risky?

Penny Stocks are much riskier than regular stocks. Penny stocks, also known as micro-caps, you will see much greater price volatility, and thus greater and quicker gains and losses in asset values. It is precisely
this volatility which draws investors to the markets, as one good pick could make you hundreds of times what
you could ever make on the larger markets.

Of course, there is more risk than buying bonds, blue chips or defensive stocks - but this added risk is tempered with the possibility of making the big gains. Most micro-caps, but not all, are resource or technology
companies who initially sold shares in an effort to raise money for exploration
or product development programs. Many of the companies have large debt loads
and are not necessarily making more money than they are losing. However, it is
the potential of a major or even minor success in their quest that often
incites dramatic price climbs, and this is where their value lies.

Micro-caps companies change their names more commonly than other publicly traded companies, and are also subject to more stock-swaps and consolidations. In any of these events, your shares in your account will be
automatically replaced with the appropriate stock by your broker and notice
will be delivered to you. On rare occasions, the respective company can become blacklisted.
This means that the shares will no longer trade on the exchange, and if the
company does not get listed on another exchange or re-instated at a future date,
you may be subject to a loss of capital equal to 100% of the total investment.

Most penny stocks have only a few million dollars in net tangible assets and have a short operating history. Most financial advisors advise against buying micro-caps because most people lose
money, the commissions are huge and they are subject to price manipulation due
to the small float. So it’s better not buy more stocks to afford a great loss.

To conclude, remember that small cap stocks carry greater risks and less liquidity. Avoid over exposure. Invest after investigating. If you follow these rules, are careful, and lucky, you may make a good profit from
penny
stocks.

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