The term “penny” stock is somewhat inaccurate, because stocks considered in the penny stock category can have values of as much as $5 a share. Penny stock is more a description of the market for these stocks, which can be loosely-regulated and very volatile. It’s very easy to make mistakes investing in penny stocks, especially if you are a new investor.
1. Falling for the “pump and dump” scheme
A “pump and dump” occurs when some unscrupulous group or person touts false or misleading news about a penny stock to quickly boost its price so they can sell the stock and make quick money. New investors in penny stocks who hope to get rich quick can easily fall prey to these scams.
2. Failure to do research
Companies that are in the penny stock range are there for a variety of reasons. Some are former high-flying stocks that fell after a scandal or a failure to adjust to changing business conditions. Others are stocks in companies that have unproven products or technologies that have failed to produce sufficient revenue. Before investing in penny stocks, it’s important to research the company to know what you are getting into.
3. Failure to understand the liquidity market
Penny stocks often are thinly traded, meaning it can be difficult to sell, either to take advantage of a gain or to limit losses. New investors often fail to understand this aspect and plan for it.
4. Failure to prepare for losses
Many investors see the penny stock market as a way to get rich. By buying a stock at a very low price, the opportunity for profits is endless. But that rarely happens. More often than not, penny stocks keep falling, leading to losses for those who invest in them.
5. Buying “at market”
Because of the lack of liquidity in penny stocks, it’s easy to pay too much for one. A big mistake is putting in an order at market price, meaning, essentially, you buy at whatever price someone is willing to sell. Make sure to put a specific price on your buy order.