Many investors and traders will be so naive as to assume that penny stocks are very similar to the mainstream stocks traded over the big boards like the New York, Chicago and Tokyo stock exchanges as well as the Nasdaq. Unfortunately, the opposite is true.
Penny stocks are one of the riskiest, if not the riskiest, investments in the market today. Even trading in futures and commodities in a recessionary market is far safer than placing one's money where penny stocks are in many instances. So, what exactly makes us say these statements against penny shares at the risk of alienating the companies, traders and other professionals who depend on said stocks for their living?
Limited in Many Instances
Well, there are many valid reasons, of course, for such negative statements about microcap shares. Let's start with the fact that it is definitely more difficult to secure reliable, credible and relevant information about many of the issuing companies. This is because the companies listed especially in the Pink Sheets are not subject to the strict reporting requirements imposed by the Securities and Exchange Commission as well as the stock exchanges themselves.
As such, investors may have less qualitative and quantitative information on which to conduct technical and fundamental analysis. The decisions made regarding otc stocks based on such incomplete data can lead to a total wipeout of the investment capital.
In connection with the lack of reporting requirements, the issuing companies listed in the OTCBB and Pink Sheets are also not required to comply with minimum standards. These standards can relate to minimum asset amounts and minimum number of shareholders. Now, contrast this with the strict minimum requirements set by the SEC and the stock exchanges.
And there is also the understandable concern for limited liquidity in penny stocks. Keep in mind that microcap shares trade in significantly lesser quantities than the larger companies in the stock exchanges. Thus, any sudden changes in their supply and demand can send the price per share crashing or soaring with the result either being a big loss or a big profit depending on which side of the fence one is straddling in the transaction.
Indeed, if analogies are to be used, the New York Stock Exchange is the Cadillac and the Nasdaq is the Lexus while the OTCBB is the Hyundai and the Pink Sheets are the dilapidated cars sold by greasy salesmen. Sure, it is possible to find gems in the Pink Sheets but it is rare to do so.
Unlimited Promises
But traders and investors should not so readily dismiss penny shares. There are unlimited promises to these stocks that only the savviest professional will learn to appreciate in full while the others scoff at it.
Penny stocks are great teaching tools for knowing how to play the market, how to take capital losses and how to strategize. It cannot also be denied that a few penny shares are on the rise and it is up to the savvy trader to catch them and, hence, profit from them later on.
The trick is in knowing as much as possible about the company, about the industry and about the economy in general. Research is always one's best friend in stock trading and investing and so it is, too, with penny stocks.
Penny stocks are one of the riskiest, if not the riskiest, investments in the market today. Even trading in futures and commodities in a recessionary market is far safer than placing one's money where penny stocks are in many instances. So, what exactly makes us say these statements against penny shares at the risk of alienating the companies, traders and other professionals who depend on said stocks for their living?
Limited in Many Instances
Well, there are many valid reasons, of course, for such negative statements about microcap shares. Let's start with the fact that it is definitely more difficult to secure reliable, credible and relevant information about many of the issuing companies. This is because the companies listed especially in the Pink Sheets are not subject to the strict reporting requirements imposed by the Securities and Exchange Commission as well as the stock exchanges themselves.
As such, investors may have less qualitative and quantitative information on which to conduct technical and fundamental analysis. The decisions made regarding otc stocks based on such incomplete data can lead to a total wipeout of the investment capital.
In connection with the lack of reporting requirements, the issuing companies listed in the OTCBB and Pink Sheets are also not required to comply with minimum standards. These standards can relate to minimum asset amounts and minimum number of shareholders. Now, contrast this with the strict minimum requirements set by the SEC and the stock exchanges.
And there is also the understandable concern for limited liquidity in penny stocks. Keep in mind that microcap shares trade in significantly lesser quantities than the larger companies in the stock exchanges. Thus, any sudden changes in their supply and demand can send the price per share crashing or soaring with the result either being a big loss or a big profit depending on which side of the fence one is straddling in the transaction.
Indeed, if analogies are to be used, the New York Stock Exchange is the Cadillac and the Nasdaq is the Lexus while the OTCBB is the Hyundai and the Pink Sheets are the dilapidated cars sold by greasy salesmen. Sure, it is possible to find gems in the Pink Sheets but it is rare to do so.
Unlimited Promises
But traders and investors should not so readily dismiss penny shares. There are unlimited promises to these stocks that only the savviest professional will learn to appreciate in full while the others scoff at it.
Penny stocks are great teaching tools for knowing how to play the market, how to take capital losses and how to strategize. It cannot also be denied that a few penny shares are on the rise and it is up to the savvy trader to catch them and, hence, profit from them later on.
The trick is in knowing as much as possible about the company, about the industry and about the economy in general. Research is always one's best friend in stock trading and investing and so it is, too, with penny stocks.
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