People generally think that one can make million by trading penny stocks. But this statement may not be true of all. Instances are there people lose their main capital in trading this. Particularly beginners are prone to this risk. Caution is must required before investing. People are attracted due to low share prices. But things are usually not what they seem to be.
Besides they are no such instances of people making million in trading penny stocks. It may be that investors first trade penny stocks to get acquainted with the stock markets. After getting deep knowledge, they may be investing in big cap markets.
The question arises why trading penny stocks are prone to risk. There are many reasons that can be taken into account. The major reason is lack of adequate knowledge. These stocks are not listed on major stock exchange markets for which they are not forced to follow the strict reporting criteria. These companies generally offer very little fiscal guidance, and tend to rely much more on hype.
Penny stocks usually trade gradually as it has very small amount of shares actively traded and thin capitalization. Therefore several buyers or sellers, and some news or rumors can influence this trading. A number of penny stock companies use spam email to promote their products. They send out to large groups of internet users to persuade them to but their stocks. Then people start buying creating a great demand for the stocks. So the price goes up, and the investment starts to look like a great deal. At this point, the pump and dumpers will start selling all the shares they can. But soon later the price goes down. In this way the pump and dumpers make the money, and the investors are left holding the empty bag.
This trick is very common, and penny stocks are almost always what are used for the promotion. Particularly small and new investors who have tiny amounts of capital become victim to this. Most of these types of investors purchase a large amount of shares with the hopes to get massive returns. Most end up losing their capital.
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Penny stocks refer to those stocks in small cap companies that trade over the counter and are also called OTC or micro cap stocks. They are traded outside the major
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