That's a good question... should you buy penny stocks? Why don't we weigh some of the pros and cons?
In the United States, a penny stock is one that trades for less than $5 per share on any market. In common conversation, however, the term can apply to any low-priced, easily manipulated stock, and it often refers to stocks sold outside one of the three major exchanges (NYSE, NASDAQ, and AMEX).
Because they're priced so cheaply, penny stocks are a very tempting way to break into the stock market. They have the potential to increase in value by over several hundred percent in a short time thanks to their low prices. The problem is that for the same reason, there's a big potential for high losses.
If you buy penny stocks, you may find that they are harder to sell than you anticipated. Because these stocks don't have as many investors, they are usually not traded as often as the more popular and pricy stocks.
You're taking a risk when you invest in these kinds of stocks, because if you are looking into a less known exchange, the stocks may not be subject to the same standards and requirements that other stocks are. This means that they aren't as stable.
Another thing: Penny stocks are a great source of income for fraudulent individuals. This is due to the stock's less known status. Through spam emails and internet message boards, many people easily mislead potential investors.
They get investors to pour huge amounts of money into a stock that has no real potential for growth, and then selling their own shares when the price rises. This scheme has a name: "Pump and Dump." It profits the fraudulent and results in big losses for the naive investor.
So, their great prices may encourage you to buy penny stocks. However, be aware of the potential pitfalls before making any investment.
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