So, how volatile is penny stock? As it represents developing companies with limited resources and cash, it is suitable for investors with high risks tolerance. This is to say that penny stocks have higher volatility levels. It is important to notice that many companies considering penny stocks are still new. Worse, they could be in the middle of approaching bankruptcy. In most cases, the information regarding this company is not available. Thus, the lack of history in the company risks investing in penny stocks.
In addition, penny stocks do not have much liquidity and fraud. Therefore, investors would be unable to sell their stocks when they want. As a result, the investor needs to lower their price so that buyers find it attractive. The fraud could somehow happen because low liquidity allows opportunities for traders to manipulate stock prices. In a popular trading scam, there is this pump and dump, it is a trading scam to lure investors in order to buy stock. It is to note that huge amounts of penny stocks are purchased in a period when it is on hype or on a pump.
It means that when an investor rushes to buy stocks, scammers sell their shares. Therefore, when the market realizes there is no reason to raise the stock, investors rush to sell and thus take severe losses. Therefore, when you consider choosing penny stocks for potential investment, it means that you need to gather more information to decide. In addition, information regarding corporate performance is challenging to find, thus information on penny stocks are rarely available. Plus, it is to note that if you happen to find information you need to make sure it is reliable since it’s not always credible.