Protecting Yourself from Pitfalls in Penny Stocks - dummies

Protecting Yourself from Pitfalls in Penny Stocks

By Peter Leeds

Part of Penny Stocks For Dummies Cheat Sheet

Investors who aren’t aware of the best ways to protect themselves from the risks of investing in penny stocks can sometimes get burned. But if you abide by the following pointers, you’ll be able to sidestep the vast majority of the low-quality investments, scams, and misleading information:

  • Avoid the lower caliber markets (Pink Sheets, OTC). Stick to penny stocks traded on the AMEX, OTC-BB, and Nasdaq.

  • Don’t buy any stock based exclusively on a “tip” from a friend at work or family member. Always do your own research before investing in any stocks.

  • Never follow free stock picks! Whether you hear about the stock through a free newsletter, mailing list, or e-mail, keep in mind that free stock pickers have hidden motivations. They trick you into buying by using dishonest information and tactics, and dump the shares as soon as they mislead enough people to invest.

  • Only get involved with fundamentally solid penny stocks. You can quickly ascertain a company’s quality through a simple online check of its financial position.

  • Don’t fall for incredible stories in stocks. Some of the worst investments have an excellent “business concept,” such as a cure for a major disease, or an engine that runs on the power of gravity. Story stocks are usually terrible companies from a financial position, and the compelling nature of their business concept has pushed the shares well above any sensible valuation.

  • Call the investor relations contact at the company and ask a few questions. They will be happy to speak with you, and posing the right questions will enable you to ensure that the business is legitimate.