Year 2008, the year of the great downturn in the stock market around the world, has left my stock portfolio halved from the where it started. Looking back of what happened, I guess one of my biggest mistakes before the crisis was to invest on few penny stocks. Penny stocks are stocks that are traded in a low price, usually speculative stocks from very small companies. Penny stocks looks appealing because of the low price and the potential for a rapid growth.
In 2007-2008, you can see many mining stocks in this category on the ASX (Australian Stock Exchange). Mining boom helped the stocks grow like mushrooms in the rainy season. They usually had a great run for a while, make you greedy and want more profit, when it was suddenly experiencing a freefall. Worse thing was, even then, I still hoped that the price would go up again. I was waiting for an announcement that might lift the stock price. You might have guessed that when the long awaited announcement came, the price wasn't even move.I paid dearly for the mistakes, but I guess it's all come down to learn by experiences.
As a new investor who do not subscribed to any paid broker, I relied my research on the chart and story of the fundamentals. What I didn't realise, was that in some speculative cheap stocks, there are so many manipulative actions taking place. Of course not all cheap stocks are bound to be manipulated, but it does not hurt to check everything before we buy. Bad decision could cause a good damage in our investment.
There are risks with any investment. But certain risks are greater with penny stocks. One of them is the risk of manipulation. Because of their nature, penny stock is easy to manipulate. After the brokerage firms acquire a large number of shares at a low price, they can manipulate the stock by creating an artificial demand to drive up the price. When manipulation occurs, the stock's price may not reflect the true value of the company, but rather the artificial demand created by aggressive marketing. The price may then collapse after the broker and other persons involved in the manipulation sell their shares.
Another risk is caused by lack of information about the investment. Unlike most large, well established companies, many companies that issue penny stock do not provide a sound data/ reports to the public. This lack of information about the company's operating history and financial health increases the risk to the investor.
The market price of such stock can be based more on the aggressive marketing of the selling broker than on the real value of the company. This sort of marketing can be found easily on the Internet listings or report on TV -- The fact that a stock is mentioned or even recommended on television or on an Internet Website is no guarantee that the investment opportunity is legitimate. Moreover, some television programs or reports are actually advertisements paid for by brokerage firms.