WHAT MAKES PENNY STOCKS RISKY?

Penny stocks are becoming more and more popular. Penny stocks are those that normally trade outside of the major market exchanges at a relatively low price and have a small market capitalization. In general, these stocks are treated to be highly risky and speculative.

And they are risky due to different factors that include lack of liquidity, large bid-ask spreads, small capitalization, and limited following and disclosure.

Here are some of the most important reasons why penny stocks are considered highly risky.

Lack of Publicly Accessible Information

If you have been trading for some time, you’d know that having access to a lot of key information about the company is very crucial to coming up with wise and profitable decisions in the market. However, for micro-cap stocks, information can be much more difficult to find.

Companies that are listed on the pink sheets are not required to file with the Securities and Exchange Commission (SEC). Therefore, they are not as publicly scrutinized or regulated as those stocks that are listed on the New York Stock Exchange and the Nasdaq.

And even if you find some information available, they’re not usually very credible.

No Minimum Standards

The penny stocks that are listed on the OTCBB and pink sheets are not required to fulfill minimum standard requirements to stay on the exchange. Sometimes, this is the reason why the stock exist on one of the exchanges.

For comparison, in major exchanges, once a company fails to meet minimum requirements, it can no longer maintain its position on that exchange. If the company cannot stay on the major exchange anymore, its stock will move into one of the exchanges for penny stocks. Minimum requirements serve as a safety cushion for some investors and as a benchmark for a number of companies.

Scarce History

Many companies that are considered to be micro-cap stocks may be newly formed or nearing bankruptcy. Therefore, such companies tend to have poor track records or even zero traceable record at all. This scarcity in stock history makes it difficult to assess its potential.

Liquidity

Liquidity is very important for a stock. If there isn’t enough liquidity, you might not be able to sell the stock. In addition, it might not be easy to find a buyer for the stock, meaning you’d have to lower your price until it is deemed attractive by another buyer.

Another problem that may arise out of low liquidity is that it provides opportunities for some traders to manipulate stock prices, which unfortunately can be done in a number of ways. The easiest one would be to buy a large amount of stock and hype it up, and then sell it after other investors find the stock finally attractive. This process is also called the pump and dump strategy.

Fraud

As indicated in the previous section, there might be price manipulators using penny stocks. Fraud can also be very much of a problem with penny stocks. There is also no fool-proof way to guard yourself against possible fraud.

Looking For A Broker For Forex Trading? Here’s Some Beginner Tips

Forex brokers are a key element in trading the forex market. A forex broker is an organisation that offers trading services. He/she makes it possible to trade on the forex market. A good forex broker is a crucial step in your trading journey. But what should you look out for in a forex broker? Starters should look for a broker offering low spreads, demo accounts and easy withdrawal and deposit procedures. As there are many manipulators out there, it is important for beginners to take the time to thoroughly review the broker before making a decision.Read More

Best Brokers for Forex Trading & Their Reviews:

A forex broker is responsible for buying, selling, and speculating currencies for trader’s accounts. A broker who is a good choice will try to reduce trader costs by offering the best solutions. The fees that traders pay include commission and other costs. The margin levels are also important for traders to protect their accounts.

Margin trading refers to making a good faith deposit to a broker chosen by the trader so that they can open new positions. As many brokers require low margin requirements, this allows traders to begin with a lower deposit. Margin isn’t a fee or cost, it’s an amount that is put aside to trade. For newbies, it is important to take the time to analyse and understand market sentiment. The margin amount is determined by the broker and can have many consequences. A margin account is essentially borrowing to increase a position’s size. It is often done to increase the returns on trading. Traders may be able leverage borrowed money to hold a greater position than they might with their own capital.

In order to be safe, traders who are just starting out should reduce their leverage. Trading is difficult and high leverage could cause traders to lose their capital. This is because leverage can be a double-edged sword. It can help traders increase their profits but can also magnify their losses. The margin call level occurs when the margin level reaches a certain threshold or level. This means that trader’s positions can be forced to close or liquidated. Traders should be familiar with the margin requirements before placing any orders. In this case, stop loss orders and trailing stops can be of great help. The broker can initiate legal actions against traders if traders fail to comply with their margin trading agreement. This is why it is so important to fully understand the implications.

Good brokers are able to communicate with their clients and offer different accounts to suit their trading needs. A broker that is attentive to trader needs and works with them to achieve them is the best for beginners. He focuses on helping them reach their goals. They can also help protect traders’ accounts from a negative balance. Traders can talk to their mentors and account managers about any questions they may have when it comes to broker selection.

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