Clearing Up Myths About Penny Stocks
July 1, 2008
People usually fear what they do not know. You cannot judge or label something until you get to know it.
First impressions are a perfect example. One person may have preconceived notions about somebody who they don?t know much about. Once they get to know that person, they realize that their first impressions were invariably false.
The same thing applies with penny stocks. Penny stocks get a bad first impression. They are quickly written off. The purpose of this article is to get past that first impression, to really dig deep and see if these bad impressions are warranted or not.
Below are some of the myths that always seem to shadow penny stocks.
Myth #1
?You?ll lose all your money if you trade penny stocks.?
This stems from the belief that trading penny stocks is risky. Actually, any form of investing in stocks will always invariably involve risk. The only way you will lose all your money trading penny stocks is if you don?t bother trying to minimize the risk. The key is to look to MINIMIZE that risk! It?s as simple as that.
For example, starting your own business incurs high risk. Does that stop people from doing it? No. And you know what? The people who succeed in starting their own business are the ones who minimize the risk. They do that by researching on how to successfully start their own business by reading, talking with people and taking action. The same thing applies to penny stocks.
You will not lose all your money by trading penny stocks provided that you minimize your risk by researching, learning, and practicing trading before starting.
Myth #2
?There?s not enough liquidity in penny stocks.?
What do people mean by liquidity? Liquidity simply means having enough volume to easily buy and sell your shares. For example, if a penny stock only has two trades, its liquidity is said to be low. There are not enough traders to buy and sell.
However, if a stock is experiencing huge amounts of trades, thereby indicating the presence of a large number of traders, its liquidity is said to be high because you can easily buy and sell shares.
Looking at an after market report recap of penny stocks will reflect that there is more than enough liquidity in penny stocks.
Myth #3
?It?s easy to make money in penny stocks.?
When it comes to penny stocks, the math looks very appealing. Buy shares at a penny and sell them for two cents. There, you just doubled your money. If it were that easy, people would be millionaires.
The fact of the matter is that trading penny stocks can be very rewarding. However, that reward goes to those who educate themselves and paper trade (practice trading with fake money to gain experience), in other words, goes to those who are willing to pay the price to learn.
That?s precisely the reason why some people are very negative toward penny stocks. They have been attracted to the potential of making money, only to rush in without any sort of training or education and become disillusioned and embittered.
Despite all the stereotypes that seem to follow penny stocks, there?s one aspect that everyone agrees on. Penny stocks involve high risk and high reward. There?s no doubt about that. The key to getting that high reward is to learn how to minimize the high risk. It?s as simple as that. It?s as simple as that.
About the Author:
Jason Brook is the author of The Ultimate Step-by-Step Guide to Day Trading Penny Stocks. His website can be found at http://www.daytradepennystocks.com
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