Penny Stocks are popular for the exciting opportunity of massive growth in a very short time. (A penny stock means the shares are bought for pennies per share).
However, the reality is that these stocks are much like most multi-level marketing schemes. There are a few people that make the big money, initially, but most people end up losing their money (to the few promoters of the stock). We all like a quick easy profit and that hooks investors but the lack of substance in the stock makes it a very unreliable source of profit for the majority.
The first problem with penny stocks is they often go out of existence because their support is based on hope and dreams but is actually made of smoke and pixie dust. The message of the company's big future is usually way out of proportion to the reality. The goal of many penny stocks is to lure investors (buyers) into the market for their shares without any true tangible future. Some are honest offerings, and many are not. Buy beware.
The second problem with these shares is that they are sold on the OTC (over-the-counter) market. That means there might not be any buyers or sellers for days or weeks. Just because you want to get out and sell them, doesn't mean there is a buyer ready and able to buy it. These are not "liquid" like the normal exchanges with higher trading volumes. You need to wait for the slower, manual methods of trading to happen.
The third problem is that the corporate books are not the same level of audit and accountability as larger (established) companies. Again, the market is driven by stories, hype and hope. It's doubtful you will see a profit in the near future. The promoters for these shares will say things like "all big companies start like this." That's not true. Also many failures start this way. They go to zero. The other type of commentary from a promoter is "It's so cheap to buy these and there could be a massive upside." Although that has truth, it's also very unlikely. Much like buying a lottery ticket can also be a big up-side for cheap. The low chance for success isn't usually told to the prospective buyers, unlike lottery tickets, which are required to publish the odds somewhere, even if only in very small print.
I could go on with other problems, however, the above should be enough. If it doesn't give you reason for caution, then nothing will.
A "wise" investor means having experience. Hard-knocks is one way to gain wisdom. Another is to learn from others errors. What are the chances for success with penny stocks? Ask the promoter AND do your own research if you are offered one of these types of stocks for sale..
