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Penny stocks have been around for a long time, but Penny stocks are good long-term investments?

In the movie “The Wolf of Wall Street”, Scammer Jordan Belford began to sell worthless stocks to unsuspecting retirees.

These stocks are usually sold with promises of huge potential earnings, and most of them are called “dirty stocks” or “pink stocks” because they are small or new companies that are not sold on major exchanges.

Obviously, most of these stocks have gone to zero, and Belfort has collected commissions, and investors have lost everything.

Low-priced stocks It may be a tempting bargain-cheap, affordable stocks that have the potential for large price fluctuations. But volatility goes both ways, and penny stocks are not always good in the long run.

In fact, they usually price in this way for a reason.

What are penny stocks?

A penny stock is a stock that a very small company sells from a traditional market exchange, usually because their value cannot be maintained above $1.

The stock price of 1 USD is usually the minimum required to be listed on major exchanges such as the New York Stock Exchange (NYSE) or Nasdaq. If the stock price drops below this price, the company will be in danger of starting.

The real definition of a penny stock is any stock that trades for less than $5, at least according to the US Securities and Exchange Commission. You can occasionally find these stocks on major exchanges, but most can only be purchased over the counter (OTC).

There are two types of over-the-counter penny stocks: OTC Bulletin Board Stock and pink sheets. Based on the Jordan Belfort anecdote above, you can guess which group is more rough.

Bulletin board stocks are listed on the computer network and must meet specific SEC listing requirements. The pink sheet only needs to meet the requirements set by the OTC exchange, and is not obligated to report any data to the SEC.

Although bulletin board stocks must meet certain requirements of the US Securities and Exchange Commission, these requirements are much less intrusive than those of companies listed on major exchanges such as the New York Stock Exchange.

And the pink sheets?

I wish you any reliable data from them. Trading stocks always carries a certain degree of ambiguity and ambiguity, but low-priced stock trading does leave fundamental investors ignorant.

Why are penny stocks riskier than traditional stocks?

Indeed, every company must start somewhere. Over the years, some low-priced stocks have become worthless investments.

But remember, there are reasons why penny stocks are traded on the bulletin board or on the pink list. Here are the three biggest risks faced by low-priced stocks.

  • Poor company prospects – Let’s not go around in circles: most companies listed on the over-the-counter market are bad companies. They often carry debts, hide some kind of fraud, or are managed by clumsy or inexperienced executives. The next Amazon or Google will not be on the fan list, 99% of these companies will never be profitable.
  • Not traded on major exchanges – In order to be listed on major exchanges such as the New York Stock Exchange or Nasdaq, you must have certain capital and trading volume requirements. For the New York Stock Exchange, a company must have a market value of $100 million and at least 1 million shares outstanding. Major exchanges also requested more information to the SEC. Low-priced stocks are usually illiquidity issues with opaque financial statements.
  • Common goals of scammers -Whisper? Check. Highly unregulated? When low-tradable stocks are traded in unregulated markets, this is a bat signal for scammers. Since low-priced stocks usually have very few tradable stocks and low market capitalization, a large purchase can easily push up the stock price. And because these markets are less scrutinized, scammers are eager to entrust them to unsuspecting investors.

Trading and investing in penny stocks

If you have to trade low-priced stocks because of volatility that is too attractive, you need to set realistic expectations for the results.

Trading a penny stock is like playing a penny slot machine in a casino-you are gambling, simple and straightforward. Most low-priced stocks are backed by companies with poor foundations on rough balance sheets.

Since the fundamentals of low-priced companies are almost always poor, the other two ways to succeed are inside information or technical analysis. Insider trading is illegal and certainly not worth the risk for low-priced stocks.

Because of the floating and low market value, it is not difficult to find out who is trading based on non-public information.

You can use technical analysis when trading low-priced stocks, but remember that technical analysis is the study of other traders, not the stock itself. Higher trading volume makes technical analysis more accurate, which is why support and resistance signals produce better results when there are more liquid stocks.

But penny stocks are usually stocks with low liquidity and low liquidity. When stock trading is so scarce, it becomes more difficult to locate slam dunk buy and sell signals.

If you have ever traded before or after trading hours, you will understand how low trading volume and weak liquidity can completely change your trading strategy. Getting in and out of positions can be difficult. If your trading turns to the south, you may not be able to find a taker for all the stocks in your position.

Don’t invest any money you can’t afford to invest in low-priced stocks.

It is best to conduct day trading with a full understanding of your risk exposure and technical analysis. We teach both in the course.

Bottom line

Trading low-priced stocks is a risky attempt and is not recommended for the faint-hearted. But long-term investment in low-priced stocks? That is stupid.

Low-priced stocks are risky long-term investments because many of them are debt-laden scams. The listing requirements of major exchanges can be tedious, but not entirely discriminatory.

If a company fails to meet the requirements, it is almost always for legitimate reasons.

Yes, penny stocks occasionally generate huge returns, but this is usually more suitable in a shorter period of time Day and swing traders.

If you seize the opportunity, penny stocks can of course double or double, but they also lack liquidity. Even a rapid doubling cannot guarantee profitability, because you still need to sell the stock before it falls back, and buyers who are willing to buy may be in short supply.

Always understand the risks of trading low-priced stocks and never treat them as long-term investments.

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