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Penny Stock Risks and How to Avoid Them
Risk 1: Information is scarce - Not much you can do about this.
A lot of times you can check www.pinksheets.com and other reliable
sources. Make sure the sites you use to gather information are
reliable, otherwise you may pay for it in the end. Also, try calling
the company and get a feel for how they think business is doing.
Risk 2: Penny
stocks on the pink sheets are not required to report financial data.
This means that the company can lie and hide their losses. Make sure
you believe in the company and do not follow into hype.
Risk 3: No history.
Since many penny stocks are newer companies, many do not have any
history of earnings or activity. Many may also not have any money and
may have to dilute the share price. Avoid this by investing in
completely new companies unless you have a huge amount of faith in it.
Risk 4: Pump and
Dumps. Pump and dumps are very common in penny stocks. This is when a
person or many people hype up a stock so people start buying it, when
really the hypers are selling those people the stock. Therefore, the
stock price starts going up, but crashes soon after because the true
value of the company is way less than what the hypers revealed. Avoid
pump and dumps by not buying every stock someone says is going to make
a 100%+ gain. Make sure you do lots of research before buying a penny
stock. Some hype is good because it shows interest and confidence.
Also, be aware of bashers. Bashers can be found on message boards such
as IHUB and many others. Bashers come into good stocks and try to scare
you out of your shares. Many will say bold statements without anything
to back it up. They do this because they want cheap shares. More
bashers are typically found on message boards of a good stock. They
want to get cheap shares and make a bigger profit.
Common posts of bashers: "reverse split" "this company is a scam" "pump and dump" "dilution"
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