Other Risks for Penny Stock Traders
Besides the single biggest risk for penny stock traders, there are other common pitfalls to watch out for. The great news is that you can easily avoid the following dangers, just by being aware of them.
Low tradability, low visibility, hype, delistings, dilution, equity risk, market risk...
Low Visibility The company does not furnish regular financial reports.
Solution: Stick to trading penny stocks listed on the premiere exchanges (Nasdaq SmallCap, Nasdaq National, AMEX, and some OTC-BB. Avoid most OTC-BB and all Pink Sheet stocks.)
Low Tradability The stock trades very few shares per day, and there is little investor interest.
Solution: Focus on higher volume penny stocks, or those with greater investor interest. You can tell by daily trading volumes if a stock may be problematic. Look for at least 20,000 shares traded per day, but the more, the better.
Stock Hype How do you know what information to trust? Companies have been known to 'exaggerate' their situation.
Solution: Make sure you do your own due diligence on the companies, or get leads about great penny stock companies from a proven newsletter or service. The best scenario involves doing your own research on penny stocks that you have been alerted to through a professional service, and only getting involved after you have looked into the company.
Did You Know?
Most losses penny stock traders make, and the majority of mistakes, can be easily avoided. In fact, by familiarizing yourself with the pitfalls, you can quickly protect yourself from the risks.