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Penny Stocks Are Dangerous, Why Do So Many People Invest in Them?

August 25, 2023 Blog

Penny stocks are high-risk investments that can leave retail investors facing significant losses. So, why do so many people invest in them? This is a question I was recently asked to answer for a documentary on CNBC.

The documentary discusses the risks associated with penny stocks (including “meme stocks” like GameStop); and, in the documentary, I explain both why penny stocks are so popular and why many investors end up falling victim to scams. The documentary features insights from the Executive Vice President of the Financial Industry Regulatory Authority (FINRA) and other experts as well and is well worth watching for anyone who has questions about this unique segment of the retail investment market.

Why Are Penny Stocks So Popular?

In the documentary, I break down three reasons why penny stocks are so popular:

1. They Are Cheap

As their name suggests, penny stocks are cheap. They provide a low barrier to entry, and this makes them intriguing to individuals who don’t have a lot of money to invest. Unfortunately, many of these individuals are also new to investing, and, as a result, they do not have a clear understanding of the risks involved.

2. They Are Heavily Promoted (or “Pumped”)

Penny stocks are often heavily promoted (or “pumped”), especially in today’s world of social media. However, in many cases, the people pumping penny stocks are scam artists who are preparing to dump their shares after falsely inflating the price through unsuspecting investors.

3. They Can Skyrocket in Value

Penny stocks can—and sometimes do—skyrocket in value. Contrary to popular belief, however, these cases are relatively few and far between, and investors must know when to get out before the price comes crashing back down.

What Are the Risks of Investing in Penny Stocks?

Now, why are they dangerous? There are several factors that make penny stocks dangerous for retail investors. These factors include (among others):

  • Lack of Information – In many cases, penny stocks are not subject to the same disclosure requirements as other securities. Many penny stock offerings are outright scams as well.
  • Lack of Oversight – Penny stocks trade on the over-the-counter (OTC) market, which is not nearly as heavily regulated as the NYSE or NASDAQ.
  • Lack of Accountability – Due to the lack of oversight and regulation, individuals who pump and dump penny stocks often face little (if any) accountability. This allows them to keep perpetrating scams over and over again.
  • High Volatility and Limited Liquidity – The penny stock markets are highly volatile, and once a penny stock crashes, retail investors can find it difficult to sell.
  • Scams and Fraud – Above all, investment scams and other forms of fraud are a very real concern in the penny stock market, and this alone leaves main retail investors facing substantial losses.

Are You a Victim of Penny Stock Fraud? Contact Us Today

If you believe that you may be a victim of penny stock fraud, you can contact Zamansky LLC to learn more. Call 212-742-1414 or get in touch online to request a free initial consultation.

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