Avoid These Risky Investment Ideas (7 of 10)

Penny Stocks: What Traps People

“Under $5 per share” sounds like a steal for many, but that’s where the benefits end for these stocks. As the old saying goes, “you get what you pay for”. And let me tell you, this is a terrible investment idea.

The biggest thing is while the price is laughably low, these penny stocks are traded on what’s known as over-the-counter (OTC) markets. And these markets aren’t as regulated as traditional stocks. To put it into perspective, companies who trade through these markets aren’t required to provide any inner workings of the business (i.e. their audited financial statements). This means that you are essentially agreeing to put money towards something that you don’t even know.

The Dangers Of Penny Stocks

Penny stocks are literally the roach motels of the financial world. You can check in at any time you like, but you’ll have a tough time checking out. Penny stocks don’t shift hands that much, and because of their low value, it’s really difficult to sell them. This implies that there is a relatively small pool of buyers, which is the perfect mixture for scammers to attract buyers and scam them.

It’s best that you avoid these kinds of stocks, however there are some other small stocks worth looking at in the form of small-caps. These types of stocks are small, but they usually show you a total share value, and market capitalization that ranges between $300 million and $1 billion.

You can find these small-caps on several indices that are respected throughout the financial world too. The most notable ones are FTSE Russell and Wilshire Associates, which track them, and there are several mutual funds that track these indices too.