Investing in Penny Stocks – What’s the Risk?

Penny stocks are an extremely attractive investment option for most people due to the fact that they allow investors to purchase a HUGE number of shares at a very low price – often lower than $2 to $5 per share. As you can imagine, the low price and high number of shares means the potential for amazing gains if the stock performs well. However, you should also keep in mind the risks if you are going to buy penny stocks.

What are the risks involved?

Admittedly, the risks involved with cheap penny stocks is somewhat low – namely because the stock is cheap. However, problems can arise when untrained investors become carried away with the hype and invest hundreds of dollars per day with the expectation that they will all generate a hefty return.

You see, the appeal of penny stocks is that you can purchase a large number of stocks for, on average, less than a few hundred dollars. So, in reality, there is really not much of a risk because we aren’t talking about a multi-thousand dollar investment that you might make on the open stock market. If your penny stock picks soar, you will likely double your initial investment and come away with a few hundred dollars in profit for the day; if your penny stock analysis flounders and your picks drop fifty-percent, you still have only lost around $100 or so.

While the profits or losses depend on the individual and his adeptness at choosing the truly hot penny stocks, beginners who invest moderately and due their due diligence should do fine financially.

Why can it be difficult to predict the best penny stock?

One reason that penny stocks are so cheap is because there is generally less information available for those companies than you would find in other markets. You may be surprised when searching for which penny stock to buy that some investment options simply have no information available at all. So you are left with a balance… extremely cheap shares for sale but with little concrete information to base your decision… Some investment options will be more palatable because you actually will find information, but be prepared sometimes if you are unable to make an informed decision.

How does Nathan Gold predict the top penny stocks?

As you may know by now, Nathan Gold is the creator of the Penny Stock Egghead system that he claims generates him thousands of dollars per day. Although Nathan would not reveal his exact method when I requested information to help write this review, he did hint at how he comes up with his picks.

He told me that, to the untrained penny stock investor, spikes in the price appear completely random. However, his research revealed that 7 out of 10 times, these spikes are the result of promotions. Unfortunately, I was unable to convince him to reveal his secret system to me, but he claims to have developed a method to find out which cheap penny stocks are about to because extremely expensive as a result of these promotions.

He provided scans of his tax returns and E*TRADE financial records, and I have to admit that I was a little impressed. He also showed me proof that he is a “guru” in his field and has a sizable following of people enthusiastic about investing in penny stock that he recommends.

If he truly is able to predict promotions before they occur, that would provide a huge advantage to him and those with whom he shares the information – and significantly cut out a lot of the risk!

So, all in all, how can I enter the market with minimal risk?

Take things slowly… Gauge the market and do your best to follow what more experienced traders are saying in bulletin boards and online forums. Start with a small investment of $100 or a little more and trade at a moderate pace. If you pick a great penny stock right out of the gate and make money – good for you! If you lose money, it’s alright because you are only investing a small amount each week or month.

The most important thing I can stress is do not let your emotions control you! You need to be disciplined and have an investment plan. Investors who structure their investment plan prior to trading often stand the best chance of making profits and providing the most security in mitigating any losses. As time progresses, you will gain a much better understanding of which penny stocks to buy and become a much better penny stock trader.

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