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Dispelling Three Modern Myths About Penny Stocks

  • July 19, 2016
  • By Grace
Dispelling Three Modern Myths About Penny Stocks

Penny stocks are the subject of fierce debate and controversy in the world of investing. And why not? If someone promised you a 1000% return on your initial investment, you’d naturally be skeptical, right?

The questionable reputation of penny stocks comes from a number of myths which have been perpetuated for years. However, penny stocks do have the potential for big returns, granted you know what to look for.

By shedding the light on the three biggest myths surrounding penny stocks, you can decide for yourself whether or not they’re worth your potential investment rather than relying on rumors.


Myth #1 – Penny Stocks Are a Scam

Penny stocks represent inexpensive, “over the counter” stocks which are traded outside of the realm of major markets. Due to their relative low cost (often under $5 per share, but potentially even lower), investors can put their cash in a relatively high number of stocks versus the traditional market.

Since penny stocks are so cheap, they are prone to “pump and dump” scams in which promoters hype a stock to a wide array of potential investors, who then immediately sell once the stock has risen. The reason for such scams comes from penny stocks’ low barrier to entry in terms of price.

The notion that all penny stocks are a scam comes from such stocks’ reputation as get-rich-quick schemes. News flash: get-rich-schemes are exactly what they sound like. Likewise, Forbes notes that not all penny stocks are scammable.

In fact, many penny stocks represent reputable companies just getting their start, overlooked by traditional investors. The key to successful penny stocks is understanding the market and which stocks to avoid rather than simply blindly following trends.

Myth #2 – Nobody Actually Makes Money on Penny Stocks

The second myth surrounding penny stocks is that, simply put, nobody actually profits from them.

Not true.

There are a number of penny stock success stories out there, including that of Tim Grittani who turned $1,500 into $1 million in three years. Grittani notes that his success didn’t occur overnight, but rather years of consistent trading, timing and research.

If something sounds too good to be true, it probably is. Investors should take a realistic approach to investing rather than simply expecting instant results.

Penny stocks don’t represent overnight success; instead, think of them as a slow grind toward turning small investments into big profits. In short, making money from penny stocks is a marathon, not a sprint.

Myth #3 – Penny Stocks Don’t Represent Reputable Companies

Many naysayers try to point out that penny stocks represent scam artists and not legitimate companies.

Wrong again.

In fact, that are a number of reputable brands who started out as unknown faces in the world of penny stocks, including…

  • Pier 1 Imports
  • True Religion
  • Monster Beverages
  • Sirius XM

Part of the allure of penny stocks is unlocking the potential of these small, unknown companies. Again, the notion that all companies involved in penny stocks are scammers is completely false.

While there are risks involved when dealing with penny stocks, the fact remains that there are reputable companies and smart players in the space with the potential to make money. By understand the in’s and out’s of the market and knowing how to spot suspicious stocks, you can better poise yourself for success when dealing with penny stocks.


By Grace, July 19, 2016
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