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One of the downsides of investing in penny stocks

by , 13 November 2015

Investing in penny stocks can be a great way to make a killing on the stock market. But investing in the smallest companies on the stock market doesn't come without risks.

So what sort of risks do you face investing in penny stocks?

Read on to find out…

The risks of investing in penny stocks

There are a few different risks that you need to be aware of before you embark on investing in penny stocks.
One such risk is volatility. Due to the small company size, the number of shares traded for penny stocks can be small. This means that its share price is more prone to jumping around compared to larger, more liquid stocks.
But there is another risk you need to be aware of, and this is the risk of fraud.

The risk of fraud with penny stocks

A penny stock is more vulnerable to fraud as it doesn’t have as many beady eyes on it as a larger companies does. Saying that, the recent scandal with Volkswagen is testament that the big boys can also get away with deceit before the truth finally catches up with them.
Large companies will have a number of analysts, stock brokers and investors watching their every move. With smaller companies, this number will be much less. And this means that some companies may try to get away with less than honest behaviour.
This is a risk that comes with investing in all companies, but particularly small ones.

Investing in penny stocks

When looking for new penny stocks, keep in mind that fraud could be at work. To find the best penny stocks out there, you should only look at the stocks that are making a lot of cash and profits, are growing with good prospects, and that have a sound management team.
If you find something you’re not happy with, investigate until you find answers. If you’re still not satisfied, it’s best to avoid.
So there you have it. One of the downsides of investing in penny stocks.
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One of the downsides of investing in penny stocks
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