Five reasons your company should avoid penny stocks

Penny stocks have received their name because of the price normally associated with purchasing them.They are normally under the $1 mark and so are referred to as penny stocks.In the United States, penny stocks are traded on what is called an over the counter Bulletin Board.They are often referred to as Pink Sheet Stocks.Here are five rather compelling reasons why your business shouldn't invest in penny stocks.

1. Penny stocks are extremely speculative

As it is with the stock market in general, penny stocks are very speculative.People and companies who are selling them may be very optimistic about the future of a company and may have many very good reasons for a person to buy the stock.Although these reasons may be compelling, exercise extreme caution when considering penny stocks.They are called what they are for a reason and they only cost as much as they do for a reason.

2. Common targets of manipulation and fraud

Because penny stocks tend to generate a lot of hype and excitement, they are generally an effective and easier way for schemers to get gullible people to waste their money on something that really has no value.It is also easier to commit fraud on these stocks because they are generally obscure companies that aren't familiar to most people.They are often described as up-and-coming companies that will compete with other larger corporations on recognized stock exchanges whose stock price can be several hundred times that of a penny stock.Statisticians estimate that 75% of companies whose stock is traded for less than $5 per share will go bankrupt in any given ten year period.Because of the stocks lower prices, people who purchase large amounts are actually able to influence the price of the share by their actions.Someone who has a lot of money in a penny stock can inflate the perceived value of the company by purchasing more and it will look like people are rushing to buy the stock.Other investors may decide to buy the stock too and this will again drive of the price, benefiting the person who purchased a lot of shares.

3. Not as well policed as larger exchanges

Penny stocks and their bulletin boards aren't monitored as closely or severely as the major stock exchanges.The rules of engagement are less clear than those of Wall Street and many people take advantage of this situation to commit fraud and other dishonest acts.Many companies that offer penny stocks manage to evade the laws and rights that protect investors, because they are often not actually in the United States.It is more difficult to police these organizations and neutralize the threat to American investors because of the international restrictions.

4. Fodder for online chat rooms and forums

Because of the ability to make a lot of money fast with penny stocks, there are many sites who promote their purchase through chat rooms and forums.When someone who wants to invest in the stock market but doesn't have a lot of money to throw around hears about a very low-priced stock that could make them money, they are excited to spread the word and tell anyone they know (and many more who they don't know) about it.Don't be drawn into the hype of these discussions because they will almost inevitably lead to a large loss of money.This is another venue for people wishing to commit securities fraud.

5. Full of misconceptions

Penny stocks are also full of misconceptions that make them enticing to some investors.Caution is again recommended in this case.Many penny stock investors like to spread the word that companies such as Microsoft and Starbucks started out trading for less than $2/share.This is simply not correct and represents the mentality of someone who invests in penny stocks.Penny stocks appear to be full of hidden opportunity that may or may not be there and normally leave a person worse off.

It seems that there is always the occasional exception to the rule, but almost all of the time, penny stocks won't get you the money you need out of your investment at an acceptable rate of risk.If you were planning on investing in penny stocks, you may as well take a company sponsored trip to Las Vegas, because you will most likely have the same cash flow at the end.