Penny Stock Losses

“Penny stocks,” also known as micro-cap stocks, are shares of small, often newly-established companies that trade at extremely low prices, typically less than $5 per share. These companies have limited market capitalization and are usually listed on over-the-counter (OTC) exchanges rather than major stock exchanges like the New York Stock Exchange (NYSE) or the Nasdaq. Due to their low prices and limited regulatory oversight, penny stocks are considered speculative investments.

What are the Risks of Penny Stocks?

The main attraction of penny stocks is their potential for massive returns. For example, a stock trading at $0.10 per share that surges to $1 can deliver a tenfold return on investment. However, it’s essential to recognize the extreme risks and the potential for devastating losses.

• High Volatility: Penny stocks are notorious for their extreme price fluctuations. A small piece of news, whether positive or negative, can cause the stock price to swing wildly. While this volatility can provide opportunities, it also poses a significant risk, making it challenging to predict price movements accurately.
• Lack of Liquidity: Penny stocks often have low trading volumes, which means it can be challenging to buy or sell large quantities of shares without significantly affecting the stock’s price. This lack of liquidity can result in slippage, where you pay more or receive less than the expected price when making a trade.
• Limited Information: Many penny stock companies are not required to disclose as much information as larger, more established firms. This lack of transparency makes it difficult to assess the company’s financial health, management quality, and long-term prospects.
• Susceptibility to Fraud: Due to the limited regulatory oversight, penny stocks are more susceptible to fraudulent schemes and “pump-and-dump” scams. Unscrupulous individuals may artificially inflate the stock price, luring unsuspecting investors before selling their shares and causing the stock to plummet.
• Poor Fundamentals: Most penny stock companies have weak fundamentals, including high debt levels, minimal revenues, and uncertain business models. This makes them vulnerable to bankruptcy, leaving investors with worthless shares.

What Can I Do If I Lost Money on Penny Stocks?

Many individual investors seeking returns on their investments may turn to investment professionals for guidance. These professionals have a duty to only recommend investments in their clients’ interest. When it comes to penny stocks, however, your salesperson is not an impartial advisor but is paid to sell you the stock. As a result, investment professionals are barred from recommending penny stocks without fully disclosing (1) the inherent risks associated with investing in penny stocks and (2) the broker’s potential interest in the transaction.

If you lost money due to penny stock losses and suspect broker misconduct, call ChapmanAlbin for a free consultation.