It is inherently risky to invest in speculative penny stocks, but once you add the element of penny stock trading online, it gets even riskier. Both trading online and investing in penny stocks can harbour hidden dangers—and here are some of them.
Those following the Successful Investor approach know there are several potential risks when you venture into penny stocks. There’s even more risk when the investor engages in penny stock trading online.
Overall, the odds against success are very high with these speculative stocks. And they can provide fertile ground for stock promotions and investing scams. Penny stocks can also be more easily manipulated than most stocks because of thin trading and price volatility.
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Some investors may look at penny stock trading online as a fairly quick and convenient way to build wealth, but there are many hidden dangers that may not be easy to spot at first
The main risks of online trading come from the fact that it all may seem deceptively easy. The lower costs and higher speeds of online trading can lead otherwise conservative investors to trade too frequently or even dabble in penny stocks.
The apparent ease of online trading may even encourage investors to take up short-term trading or day trading. That’s just another danger of trading stocks online—there’s a large random element in short-term stock-price fluctuations that you just can’t avoid.
Automated stock-picking systems can backfire when you’re stock trading online
Some investors who trade stocks online use automated stock-picking systems to help them make investment decisions. These systems are typically marketed with impressive-looking performance records designed to make investors think they are sure to make guaranteed profits. However, those records are typically derived by “back-testing” the program against past data. In other words, the promoters go back through old trading records and see what would have worked in the past.
Automated stock-picking systems essentially do two things: First, they narrow down the data you use when you make investment decisions. Second, they apply a fixed rule, or rules, to draw a conclusion or an investment decision from that selection of data. Unfortunately, the market’s key concerns continually change.
Today’s good investments can turn into tomorrow’s dead ends. For a time, these systems seem to work, but that’s usually coincidental. If the market is going up and the system tells you to buy volatile investments, it automatically generates profitable trades. But they can just as quickly turn around and begin pumping out unprofitable trades. Often this happens just when they can do the most damage to the investor relying on the system.
Penny stock trading online can lead investors into dangerous territory
This random element can be profitable for short periods. But you can’t reliably profit from it over the long term. In fact, most short-term traders wind up losing money. By the time their beginners’ luck fades, many are trading in dangerously large quantities.
Frequent trading can also lead you to buy lower-quality, thinly traded stocks. The danger arises from the fact that the bid and ask spreads of many of these investments can be so wide that the share price will have to go up significantly before you’ll even begin to make money on a sale.
You can make trades quickly in online trading, and that cuts your commission costs. However, for successful investors, this is a bonus, not the object of trading stocks.
It is far more important to follow the Successful Investor approach and focus on high-quality, well-established companies and how they fit into your portfolio. The longer you hold these stocks, the greater the chance that your profits will improve, as well.
Four negative qualities of penny stocks every investor should know
The least promising penny stocks require the most intensive marketing and promotion
Penny stocks can be much riskier than other investments
Penny stock promoters sometimes aim to make companies appear bigger than they are
Major company involvement is frequently exaggerated with penny stocks
Buy penny stocks as a small portion of your portfolio, if that
When you buy penny stocks you could have a big payday if you make the right choice. But the odds against success are high. Penny stocks are almost always involved in riskier ventures, such as finding mineral deposits that can be mined at a profit, commercializing unproven technologies or launching new software.
In general, penny stocks have lower trading volumes, or liquidity, and this lack of liquidity means it may be more difficult to sell a stock when you want to. They also suffer from large price fluctuations, so any bit of news may cause a penny stock’s price to rise or fall.
Ultimately, penny stocks should only be a small part, if any, of a Successful Investor diversified portfolio. You should only buy them with money you can afford to lose.
Online trading can seem like a game, even though there is real money involved. What mistakes have you made with online trading that seemed even worse once reality set in?
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