A well picked Penny Stock can be a remarkable investment. If you are fortunate enough to be able to get in on a Penny Stock with a bright future before the secret gets out, the capital growth can be enormous. But before you dive in and invest in Penny stocks, consider these potential pitfalls:
Liquidity is essential to an efficient market. If a stock is traded infrequently, it can be very difficult to get a feel for which way the share price is headed. The gap (called the spread) between the highest buyer and the lowest seller can be large enough to distort the pattern of the trades. This can make it very difficult to gauge the true "market value" of a penny stock.
There are shady characters out there who make a very good living from promoting rumour and gossip about penny stocks. These professionals might choose to "ramp" a stock by flooding stock message boards or by person to person gossip. It only takes a few people to buy a parcel of shares in a thinly traded penny stock to spike the price enough to make a fat profit from a Penny Stock.
Some penny stocks get to seemingly impossibly low levels. The chart shows they have dropped so far you can hardly think it possible for them to drop further. It's easy to get swept away with the psychology of "this can't possibly go any lower" or "this must be a bargain" simply because the shares are only a few pennies each. It is just as important to consider the underlying earnings and cash flow for a Penny Stock as it is for the broader market
There is no point trading Penny Stocks if your broker is charging you premium rates on each trade and eating into your profit margin. There are some very good brokers out there offering very low prices per trade. Zecco and Choicetrade are two excellent options as they both have efficient trading platforms and very low trading fees (Zecco offer 10 free trades a month). I also know of people who swear by Trade King, but I have never used them myself. I'd recommend setting up a free account and having a look around.
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