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Friday, June 5, 2015

The Risks & Rewards of Penny Stocks

Message boards in many investment groups and web sites are full of 'buy' recommendations for unknown small-cap stocks. Why do small investors get attracted - like moths to a flame - by such recommendations?

Two reasons: desire for instant gratification and greed. No one is willing to put in the time and effort in studying the fundamentals of a company. Much easier to follow some one's tips - and more fun if it is a penny stock, because more is the possibility of a multi-bagger.

End result? Getting stuck with unsaleable stocks, losing money, and losing faith in the stock market. Moral of the story? Small investors should read and learn about the stock market before spending a single Rupee. When they are ready, they should get their feet wet by investing through mutual funds.

Should small stocks be avoided entirely? Yes, if you are a novice. No, if you have paid your dues and appreciate and understand the risks involved.

In a recent article at investopedia.com, the risks and rewards of buying penny stocks have been explained. You can read the article here.

Related posts

The futile quest for the mythical 'multibagger'

'Fatal Attraction', or why small investors prefer small-cap stocks

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