Know The Risks Before You Buy Penny Stock

2007-03-08 10:33:40

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Perhaps, you want to invest a portion of your savings in stocks but you can't find a stock to invest in because your investment fund isn't too big. You then know that the share price of penny stocks is so low, and that virtually anybody can afford to buy penny stock. Before you join the bandwagon, try learning some more about how to invest in the stock market and find out the risks involved when you buy penny stock.

Penny stocks refer to shares that small companies issue. Usually transactions are over-the-counter in very thin trades. Their name originates from their price, which as a rule is less than five dollar a share or, in some cases, may actually be in pennies. If you buy penny stock, you're putting money into highly speculative investments. Poor management, a heavy debt burden, questionable product quality and minimal earnings are just some of the reasons why penny stocks trade at very low prices.

You should be wary about unethical people working in boiler room operations (these are teams of people making phone calls to possible investors to convince them to buy an almost worthless stock), and luring you to buy penny stocks. When you fall prey to these scammers, you would likely lose a substantial part or all of your investment. These scammers are well skilled in making you feel like you'll miss the chance of a lifetime if you don't buy penny stock.

If it's the first time you buy penny stock, you have to do extensive homework. You should make sure that you obtain independent information about companies whose shares trade for less than a dollar. Companies of this type are better than unknown ones with no price history. You must always practice prudence when investing in stock, more so when you buy penny stock.


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