7 Myths About Penny Stocks
While many Americans believe that the stock market is an effective way to build wealth, the keys to successful investing are starting early and thinking long-term. Getting rich quickly is possible, but rare.
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Getting rich on penny stocks is even more uncommon, but it’s happened. At some point during their histories, Blackberry (BB), Ford Motor (F), Monster Beverage (MNST) and Sirius XM (SIRI) traded at under $5 per share. All these, with the exception of Monster, are still not that expensive. Although they’ve split their stock a number of times since their initial public offering (IPO), even shares of Amazon and Apple could’ve been had for next to nothing when they started out.
But for the most part, penny stock markets are small, illiquid and susceptible to scammers. Trading at a low price (typically below $5 per share although shares can trade as low as $0.0001), penny stocks often represent small, emerging companies with limited market capitalization (“microcaps”).
Although the “Magnificent 7” stocks — Alphabet (GOOGL), Amazon (AMZN), Apple (AAPL), Meta (META), Microsoft (MSFT), Nvidia (NVDA) and Tesla (TSLA) — dominate the financial news, penny stocks remain mysterious and even mythical in nature.
While cheap stock prices and the potential for high returns are enticing, penny stocks are subject to misconceptions. Here are seven common myths about penny stocks that you should know before investing.
1. You Can Get Rich Investing in Penny Stocks
Well, technically you can, but you’ll have to be extremely lucky to catch the right company at the right time to make a significant amount of money. The majority of penny stocks are volatile and risky and often result in substantial losses for their investors.
Just because penny stocks are cheap, it doesn’t mean they’ll grow quicker. Many penny stocks are trash and market success is dependent on supply and demand, not stock price, reminds Investment U.
2. You Can Find Penny Stocks on Legitimate Stock Exchanges
Some penny stocks are listed on the major exchanges and are registered with the Securities and Exchange Commission (SEC). You can purchase them easily through your brokerage account. However, most penny stocks trade on over-the-counter (OTC) markets, pink sheets and the grey market, which have fewer regulations and higher risks of fraud.
3. Penny Stocks Are as Safe as Large-Cap Company Investments
On the contrary, penny stocks are typically much riskier than blue-chip or large-cap company stocks. They are often less reliable and more prone to volatility. OTC markets have less transparency and lower trading volume, so penny stocks are more vulnerable to price manipulation and illegal trading practices.
Finding stocks that will produce significant returns takes a great deal of knowledge about companies’ business models, market positions and growth strategies, according to Penny Stocks.
4. Penny Stocks Have High Growth Potential
Every big company was a small(er) company at some point. However, aside from the few that have high growth potential, many penny stocks are struggling businesses or companies in poor financial health. Most penny stocks will remain low-cost, low-quality options for investors.
5. Penny Stocks Are Easy To Research
Because many penny stocks are traded on less transparent markets, they often lack the strict surveillance and financial disclosures of larger publicly traded companies on the big boards. This can make it challenging to find accurate information and can increase the risk of scams.
At the same time, successful penny stock investors are dogged researchers and analysts who are able to find gems out in the wild. If you’re willing to do the work, you might luck out.
6. Investing in Penny Stocks Is Ideal for Beginners
They’re cheap, so you can load up on shares, but there’s much more than the eye can see when it comes to penny stocks. Penny stocks are speculative and at risk of manipulation. Hence, OTC stocks are generally not recommended for beginner investors, who should tread lightly and avoid common stake-buying pitfalls when starting out.
7. Penny Stocks Don’t Follow Market Trends
Although they differ greatly from blue-chip stocks, penny stocks are not immune to broader market trends. According to Penny Stocks, they are sensitive to market sentiment aren’t immune to shifts in economic downturns, industry shifts, regulatory changes and company announcements. Additionally, “if a particular sector is experiencing growth or innovation, penny stocks within that sector may see heightened interest from investors looking to capitalize on these trends,” says the site.
Learn More: I’m a Self-Made Millionaire: 5 Stocks You Shouldn’t Sell
While there may be a few success stories, many penny stocks represent high-risk investments that can lead to significant losses. The concept of “hidden gems” can lure investors into taking excessive risks without proper research.
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This article originally appeared on GOBankingRates.com: 7 Myths About Penny Stocks
