8 Things You Should Know About The Penny Stock Market Before You Dive Into It

Before you go investing in the penny stock market, there are a few things you should know. It's important to do your homework so you don't find yourself blindsided by scams or unnecessary debts to ensure you're making the most out of your investment.

Here is a list of eight things you should know before you even think of getting into the penny stock exchange. Of course, this list is merely a starting point to give you some basic information on the trendy and risky market.

Penny Stock Doesn’t Literally Mean “Penny” Stock

Companies that operate in the penny stock market are very small. These stock prices are normally below $5, and according to Investopedia, its total value is usually between $50 million and $300 million.

So why call it penny stock? Because, unlike shares from larger companies, these shares can sometimes cost as little as a penny.

There Are Many Terms For “Penny Stock”

Penny stock, pink sheets and micro-cap stocks are all terms used when talking about the penny stock market. Now you know the fancy words those telemarketers use when they’re giving you horrible stock options.

Beware Of The Pump And Dump

In the penny stock market, there are investors (usually stockbrokers) who will bring hype to certain companies so that people will buy into them.

These investors usually buy a large amount of a company’s stock to boost its value, and then generate some serious buzz (pump) for the company to get other less suspecting people to buy shares.

Once they’re satisfied that the stock’s profits are big enough to buy that Bahamian island they want, they’ll sell them all, sinking the company (dump) and causing it and its investors to crash.

Risky Business

Why on earth would someone invest in a company that’s so small and lacking assets that it can’t even start a bank account?

These companies provide you with very little information, if any, and when they do, it’s so vague and meaningless you start to wonder how this company was even registered in the first place.

In addition to this shady market behavior, the values of penny stocks rise and fall very rapidly in very large amounts.

Not All Penny Stocks Are Bad

While the notion of investing in the penny stock market may now cause a lot of people to turn up their noses, there are some companies that are actually trying to do a good work. (Monster Energy Drink, anyone?)

Getting Information On These Companies Is A Bit Difficult

Penny stock companies are not as heavily regulated by the SEC as larger companies, such as Apple, Amazon and Facebook.

In fact, most penny stock companies don’t even need to publish their financials to the public. This immediately sends up red flags for investors who would much rather put money into companies that have more information available, in addition to a team of people with proof of extensive experience.

Penny Stocks Are Not Very Appealing To More Experienced And Affluent Investors

While there are many investors who focus specifically on the penny stock market, there are many more who prefer a less volatile, more dependable investment opportunity.

Most people in life are risk averse; this, of course, translates into the business endeavors of people because they're seeking stability and want to have a good idea of when they’ll be getting a payout and how much of a payout they’ll be getting.

The Rules In This Industry Are Very Relaxed

As I mentioned earlier, the SEC doesn’t regulate the penny stock market as heavily as more reputable stock exchanges (like the NASDAQ).

This allows people to get away with a lot of scams (such as a “pump and dump”) and not get penalized for it. The relaxed rules also make it more difficult to pin charges on many unethical brokers in the market when investors find out they’ve been bamboozled.

As with any investment, you really should prepare yourself to lose everything you put in. There is always some amount of risk involved in any investment endeavor you approach.

With that being said, make sure you don’t fall for any penny stock scams or start investing in this market until you are entirely comfortable with winning -- and losing -- within it.

Photo Courtesy: Fanpop