Penny Stocks are the most precarious trade compared to any other category of stock traded on the stock exchange. In spite the most potential profitable stocks; these are also the most risky trade for any investor and trader. The price movement of the stock is so huge that it can move up to 20% of the value of the stock price in either direction.
Being most risky, there are also lots of problems trading into the penny stocks. The few important problems encountered during penny stocks trade are:
- Pink Sheets: Most of the penny stocks trade is not traded on the major stock exchange, rather on pink sheets. Pink Sheets platform is not a reliable and there is no such a major restriction or guideline for companies to get their stock listed on it. That is the reason these stocks are more prone to scams and frauds hence trapping the small investors.
- Low trading Volumes: The small company’s penny stocks have low capitalization and that is the reason these shares have very low trading volumes. Low trading volumes is always a problem trading the stock. The volumes sometimes are that low that it becomes difficult to even sell 200 shares.
- Lack of Information: There is always lack of information regarding the company’s financials and outcome of any AGM. The penny stocks are small company stocks which are not much highlighted in the TV news channels. There are also not even brokerage reports on these stocks. Small investor feels very difficult to get the required information for purpose of analyzing the penny stock.
- Scams: The penny stocks are very easily prone to scams. These are always on radar of the big brokerage firms and even the promoters who play big scams into these stocks. The most common scam is the pump and dump scheme.