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Penny Stocks - Does the Risk Equal the Reward
Almost all of us, if not all, have seen an advertisement at least once about a person who made a lot of money by simply going online and buying some penny stocks. We have all dreamed of being that person haven't we? The only problem is that these advertisements often don't tell you about the amount of risk which is involved when it comes to investing in these stocks. First you need to understand the definition of penny stocks. Any stock can be a penny stock. Its value just has to be lower than $ 5. There are only two types of stocks that fall into this category, start ups and stocks which are on the verge of bankruptcy.
Since the price of these stocks is so less, there is a chance that people who purchase these stocks will be able to control the price to a certain extent. This strategy is known as a pump & dump. There are a lot of people on the internet that are looking for others to con just so that they can benefit from this strategy.
So how does it work? Well the first thing of course will be to find yourself a penny stock which can easily be manipulated. Once you find a good stock, you will then go ahead and buy large quantities of that stock while the price is still low. You will even convince others to invest in the stock. Once others start investing in the stock, its price will start rising, this is the point at which you will sell your stocks and leave the others with stocks that are most probably going to be worthless in a few months time. This is how you can earn a quick profit from penny stocks.
Unfortunately, most of you will find yourself on the losing end of this strategy rather than the winning end. This is the biggest problem with penny stocks. Since they are valued so low, they can easily be manipulated. So how will you ever know if the price of a penny stock is genuinely rising or is just being manipulated? That's where research comes into play.
The first thing you need to keep an eye out for is any website or trader who offers free advice on penny stocks. If you see the name of a stock being offered for free to any and everybody, it is most probably a pump & dump scam and you should stay away from that stock at all costs. As far as research is concerned, search for companies which are showing positive results as far as growth is concerned. If you find a company promoting the release of a new product, it's a good place to start. If they have held similar releases earlier, look at the stock trends during that time. If the stock price jumped the last time they introduced a new product, it will most probably do the same this time as well.
So you see doing your own research is the only way in which you can be more or less sure that you will earn profits. Just remember at the end of the day though that there will always be a risk component involved in such investments. So don't ever put all your eggs in one basket and never ever invest more than you are willing to lose.