Many of us have received information from some source about penny stocks. Even many seasoned traders are looking for penny stocks that may become the next multi-packer like Wal Mart or Microsoft. Many also believe that dealing with them is risky business. You should always avoid such actions. Chances are, you’re throwing away good money after bad.

What is a penny stock? The stock markets of many countries have different standards. In the United States, the Securities and Exchange Commission (SEC) has classified any stock below $5 as a penny stock. Definitions can vary, with some setting the cut-off at $3, while others consider only stocks trading below $1 to be penny stocks.

What makes them untouchable? Certain issues must be considered before deciding to buy any stock. How much can you or any professional money manager try, but can’t get any meaningful information on such penny stocks? There is hardly any reliable or credible information available on which one can make informed investment decisions.

Many of these stocks don’t even meet the minimum standard to be listed on major exchanges like the NYSE or NASDAQ. Therefore, they are only listed on OTCBB and Pink Sheets. Once a company can no longer hold its position on one of the major exchanges, the company switches to one of these smaller exchanges. While the OTCBB requires companies to file documents on time with the SEC, Pink Sheets does not mandate such a requirement. The minimum standards act as a safety cushion for some investors and as a benchmark for some companies. Avoid companies listed on these secondary exchanges.

Many of the companies that are considered penny stocks are small businesses just formed or about to file for bankruptcy. These companies will usually have a poor track record or none at all; never utter the word “dividend” to any of these companies. As you can imagine, the lack of track records for these companies only makes it more difficult to pick the right stocks.

One does not know when the liquidity of such penny stocks will run out. When a penny stock is not very liquid, the stock you bought cannot be sold. You have no exit option and you will keep the shares. If there is a low level of liquidity, it can be difficult to find a buyer for a particular penny stock, and you may have to lower its price until another buyer finds it attractive. Additionally, low levels of liquidity provide opportunities for some traders to manipulate share prices, which is done in many different ways: the easiest is to buy large amounts of shares, promote them, and then sell them after other investors find them. attractive. Many also do circular trade. A group of traders form a cartel and one buys the penny stocks while the other sells them. This continues for a long time creating the illusion that large volumes are being traded and prices are rising. It is nothing more than a trap for gullible investors.

Penny stocks have been a thorn in the side of the SEC and many regulators in various stock markets. This is because a lack of available information and poor liquidity make these stock groups easy targets for scammers. There are many different ways these people will try to separate you and your money, but here are two of the most common.

Malicious Recommendations: Some penny stock companies pay money to newspapers, magazines, Internet websites, and investment professionals (many of whom can be seen on TV) to recommend these stocks. You may also receive spam emails that try to persuade you to buy a particular penny stock. Check to see if the referrers are paid for their services, as this is a bad investment gift. Make sure press releases are not falsely given by people looking to influence the price of a penny stock.

Offshore Brokers: The SEC allows companies that sell shares outside the US to foreign investors to be exempt from registering shares. These companies will typically sell the penny shares at a discount to foreign brokers who, in turn, will sell them to US investors for a substantial profit. By cold calling a list of potential investors (investors with enough money to buy a particular stock) and providing enticing information, these rogue brokers will use high-pressure sales tactics to persuade investors to buy penny stocks.

Be very careful when investing in penny stocks. Choosing a good penny stock is like finding a needle in a haystack, in all probability you will make more money playing the lottery than investing in penny stocks.