Day Trading Penny Stocks Is Not Worth The Risk

Trading penny stocks is one of the many strategies used by investors to try to gain profit in the investment world. Understanding the process, doing your research and weighing all the options are essential to making this strategy work for you.

The definition of day trading is buying and selling shares of stock within the same day. Penny stocks are shares of small companies that trade below a fixed price, usually below $1.00. Trading of these shares is usually done directly between two parties, referred to as over-the-counter. Electronic quotation systems like Pink Sheets and OTCBB keep track of penny stocks.

There are pros and cons surrounding this practice. In a positive light, one can buy large numbers of penny stocks due to the low price they carry. A substantial return may be possible when these shares are purchased at the right price. Experimenting with penny stocks is also a good way for beginners to learn about trading; the price of shares is low so that if money is lost, it will not be quite so devastating.

There are also multiple reasons why day trading penny stocks is a horrible idea. One of the biggest drawbacks is the fact that this type of trading is commonly associated with scamming. Sometimes referred to as the “pump ‘em and dump ‘em” scam, this process involves individuals who buy up hundreds of shares of penny stocks then use various methods to create interest in the underlying company. After demand has increased, the price per share rises, and the original buyer sells their holdings.

It is certainly high risk to day trade penny stocks. If a company’s stock is trading that low, it is usually for a reason. The underlying company is normally in a less than stellar situation, with fewer assets and equity. In addition, if a stock is trading that low, it could easily disappear from its listing on the exchange, thus leaving the investor out of luck. Day trading penny stocks is also a risky activity because it may be hard to find buyers. The types of companies that have these low priced shares usually have low liquidity, and that scares away potential buyers.

Using this strategy for investing is not a decision to be made lightly. Never take tips from anyone, no matter how reliable a source you feel they are to you. Do your own research and make investment decisions that are right for you. But above all, remain skeptical of potential penny stock trades. The odds are heavily against you and day trading penny stocks is no better or worse than playing the lottery.