Insight: The danger of penny stocks

Penny stocks; a quick way to get rich. An ever quicker way to get poor. Often private investors step into the penny market with the expectation of earning quick money, but soon experience the disappointment of this market. A great danger of penny stocks lies in the volume traded each day. Buying a penny stock is often not that hard. Selling on the other hand may cause a problem. Since the stock market is based on supply and demand, for a transaction to take place both supply and demand are needed. Even if the value of the penny stock you own increases, you may not gain a profit, since you might not be able to sell your stocks, because there simply is no demand for low volume traded stocks. Hence, you have an unrealized profit in an illiquid asset, so you are also not able to invest this money otherwise and you may still see this unrealized profit as a loss. Besides this problem on the penny market, we also see that the penny market invites investors to partake in risky behavior. The penny market is extremely volatile and it is hard to predict whether these stocks will go up or down. But because the first day a stock may gain 10% and the next day it may lose 15%, some investors go short or buy financial levering products on these penny stocks, resulting in very high gains if you make a right call, but you may lose it all if you make the wrong call. Since this market is highly unpredictable, instead of going short or buying complicated financial products on penny stocks, you may just as well want to consider taking your money to the local casino. Sure, the penny stock market can make you rich, but you also need to be aware of how this market works. Information is often very vague or sometimes even non-existent in this market, giving you little direction in whether the stock will create value for you. With incomplete or no information, a penny stock that seems profitable may turn out to be trash and often investors do not realize the risks of lack of information (because they don't observe possible negative information). All in all, penny stocks can make you rich very quick, but if you don't understand the market or if you don't want to take very high risks, you should stay away from this market.