One of the cheapest investment stocks could be the penny stocks. It comes with stocks that are valued less than say $5 or even at times $1. But their volatility poses high risks. This kind of trading is mostly indulged by the newbies in the stock market. They find this to be a low investment group. However, not many are aware of the fact that one can lose lot of money if they don’t play the cards safe.
Many large stock investors also park funds in the penny stock. Some of the risks involved in this kind of trading are enlisted below:
Stocks thatare traded on the NSE and so on have their documents scrutinised by the SEC. There is media attention and lot of information comes out about the company and its performance. This way the investors get a clear idea about which company is doing well and so on. Such information forms the basis for investment in stocks. When it comes to penny stocks, they are not traded in the stock exchanges. This can be a major risk as they are not coming under the scrutiny of SEC. Information is almost nil and so investors have to place their funds as a mean of luck and chance.
Lack of standards
These stocks are put up on the Over the Counter Bulletin Board. This board does not have any stringent rules and regulation. Minimum standards are also not set unlike other regular stock exchanges. Lack of standards can be risky for there is no safety parameters implied between the traders and the sellers.
Lack of liquidity
Penny stocks are risky and this is a known factor. Due to this not many traders enter this highly volatile investment market. If you wish to sell off your penny stocks, you may not find the buyers for quoted price. This can lead to possibly a loss situation as you may lower your price just for selling off the stock. Liquidity can be a major problem at times when you need funds urgently.
The penny stocks market is not regulated by SEC. A new investor may fall prey to the scams of the bad investors. Such investors may sell off their worthless stock at a higher price to the newbies in the market. They will convince them and thereby dupe their fortune. Proper reporting and lack of information is a major issue for beginners.