Full Article: Bloomberg – What Investors Should Know Before Buying Surging Penny Stocks
Penny stocks, typically defined as shares trading for less than $5, are often associated with small companies and are usually traded over-the-counter (OTC) rather than on major exchanges. Investing in these low-priced stocks carries significant risks due to factors such as limited liquidity, lack of financial transparency, and susceptibility to market manipulation schemes like “pump and dump.” The decentralized nature of OTC trading further complicates the ability to obtain reliable information and can lead to substantial financial losses for uninformed investors.
Key Takeaways:
- High Risk and Volatility: Penny stocks are highly volatile and can lead to significant financial losses.
- Lack of Transparency: Many penny stock companies have limited financial disclosure, making it difficult for investors to assess their true value.
- Susceptibility to Fraud: These stocks are often targets for fraudulent schemes, such as “pump and dump,” where the stock price is artificially inflated and then sold off by manipulators.
- Limited Liquidity: The OTC market’s decentralized nature can make it challenging to find buyers or sellers, leading to difficulties in executing trades.
- Regulatory Concerns: Due to minimal regulatory oversight in OTC markets, investors may lack protection against misleading information and fraudulent activities.
Investors should exercise caution, conduct thorough due diligence, and be aware of the inherent risks when considering investments in penny stocks.