|
|
Should I invest in penny stocks (stocks under $1) in 2012?
|
Many people visiting this website are interested in buying penny stocks.
First, lets define what penny stocks are. Penny stocks are stocks which price is less than $1 per share - hence tha name "penny stocks". They
could be traded on the same exchanges as other stocks - NYSE and NASDAQ - but usually for a limited time. These stock exchanges don't like
hosting penny stocks, so unless the company gets the share price back above $1, it will be delisted from the exchange.
Delisted stock shares are much harder to trade, so companies try to avoid that at all costs. One common way the company does it is by doing
reverse stock split. For example, if company does 10:1 reverse split, and one had 1,000 shares of that stock and it was worth $0.50 per share before
it, that person will end up having 100 shares worth $5 per share after the split. In the result, the share price is back above $1.
So why companies have shares worth less than $1? There are usually very good reasons for that. And
all of them amount to one thing - the company is in very, very big trouble. It's in so much trouble, that most investors lost any confidence in
it, sold off the stock and want nothing to do with it. Usually, the company is very close to filing for bankruptcy.
So why would anyone want to buy penny stocks in that case? The answer is simple - greed. When the stock price is so low, even a penny move
is very significant percentage-wise and promises huge returns. Thus many people try to make easy money.
When there is a promise of the easy money, con-artists of all kinds try to take advantage of it. The internet is littered with
"penny stock picks" websites and gurus that promise huge profits if you buy the stocks they recommend. All these websites work with one scheme -
"pump-and-dump". First, they pick any random penny stock and buy shares of it. That pushes the stock price up. Then they tout this stock to their
subscribers - "look, this stock is surging! buy it and make a fortune!" When regular people start buying too, it pushes stock price even
higher. This is when con-artists dump their shares. Stock price collapses right away and everybody else is left with huge losses.
Of course, not always companies which stocks are trading below $1 are garbage and they are going to go bankrupt. Citi Bank was a penny stock
for a little while in 2008. And this was and still is a powerful company. But this is an exception to the rule. Most other penny stock firms
will most likely disappear and their stock will become worthless.
If you want to buy shares of great companies, like Citi Bank, when their share price goes below $1, it might cost you a lot. Most
brokerage firms have surcharges on penny stocks trades. So it pays off to have an account with one of the
Best penny stock brokers - it cost you nothing.
In summary, buying penny stocks is usually terrible idea. Don't do it. But there are exceptions to every rule. Even to this one.
|
|
|
|
|