Penny stocks can cost investors
Penny stocks are proliferating on Wall Street. But that still doesn’t make them a good deal.
The vicious decline in the market this year has knocked a whopping number of stocks under a buck a share.
There are now nearly 400 on major U.S. exchanges for less than $1 — the highest number in over two decades.
Beginning investors might be tempted to think stocks must be a good deal. But that thinking can be costly. The dangers of penny stocks include the fact they can:
Go lower. Investors might assume if a stock has been pummeled so badly that shares are below $1, there’s only so much more it can fall. But just because a stock has fallen precipitously doesn’t mean there still can’t be lots of additional downside. Investors could have scooped up shares of Quantum, a seller of data protection technology, for just 93 cents each at the end of 2015. That means they could buy 10,752 shares for $10,000. But shares have fallen to 52 cents. That translates into a $4,400 loss.
Get delisted. The major market exchanges don’t allow penny stocks to linger forever. The New York Stock Exchange and Nasdaq, for instance, have listing standards that must be met or the stock will be kicked out. Having a stock trading under $1 is one of the triggers that can result in a stock being booted, which can stick an investor with a security that’s difficult to sell.
Be easily manipulated. It’s easier and less costly for fraudsters to buy or sell large stakes and influence the price.
The dangers of penny stocks are even higher when the stock isn’t traded on a major exchange, but rather on lightly regulated marketplaces like the OTC Pink. Then there might not even be financial statements to rely on.
Penny stocks may seem attractive, but investors with smaller amounts to invest are better off buying partial shares or even just one share of a diversified exchange-traded fund.