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A penny stock trade can be the smartest thing you do, or it could be the worst. Things tend to run in the extremes with this part of the stock market, and this is an important fact to be aware of if you want to invest in penny stocks. There are far greater risks with these types of shares, despite the impression that because these stocks cost less per share it is a good investment for beginners. To succeed as a penny stock investor you need to have experience and you need to understand the risks so you can avoid becoming a victim like so many other people out there.
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The main reason why penny stock trading is more risky than traditional trades is that the penny stock market is far less regulated than the secure exchanges like NASDAQ. Without the requirement to adhere to certain rules and regulations that the traditional exchanges provide, there is a greater potential for deceit and illegal activity. While some penny stocks do trade on the major exchanges, it is the ones that do not that are riskier.
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When considering penny stock trades, you have to take into account the practice of the pump and dump. What happens here is that shady individuals and groups will attempt to drive up the price of a stock through manipulative means, and then sell all their shares, leaving others with the now worthless stock. Typically, this occurs by posting false information about supposedly hot penny stocks, encouraging those who know little about the financial market to invest in certain stocks, and spreading false details about different companies through spam, penny stock newsletter publications and various message boards. Once the stock has been pumped up artificially, these people will sell their shares at a substantial profit and cease all promotion of the stock, resulting in the drop of the stock price.

Every penny stock trade you make can either make money for you, or lose money for you. There is far less room for error when dealing with these types of stocks, and so you need to invest your time along with your money. This means constant and consistent monitoring of your stocks and how they are performing, as well as checking out what is going on in the rest of the market and in relevant industries that may have an impact on your shares. This involves a considerable amount of time at the computer. If you can’t dedicate this time, then you will not be a successful penny stock trader.

A penny stock trade that results in a windfall of money for you is pretty rare, and the reasons why have all been mentioned above. The lack of rules and security in this market make it easy for fraudulent individuals to prey upon the inexperienced. As a result, there are so many overvalued stocks out there that are really just waiting to suck away the unwary investor’s funds. You also need the time to monitor your stocks carefully so you don’t miss out on the right opportunity. Make sure you understand the risks so that they don’t outweigh your chances of making a good return on your investment.

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