Table of Contents
Which Factors Can Have a Negative Impact on Penny Stock Prices?
Top 5 Mistakes to Avoid Before Investing in Penny Stocks
Many people are always looking for get-rich-quick options. Traders and investors are always trying to get access to information about stocks that can have a very positive impact on their portfolio, driving up their profits significantly. Penny Stocks appear to be one of the best options for a new breed of traders and investors out there. These are low-priced stocks that appear to have the potential to offer huge profits. The catch is that – these usually come with a lot of risk, which is often ignored. Read and know all about Penny Stocks and the important factors that have a major impact on its prices.
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What are Penny Stocks?
These are stocks available at a low price, generally under INR 20. The market capitalization for these stocks is low. For any company out there, the value of outstanding shares trading in the market is regarded as the market capitalization.
Read on: Multibagger Penny Stocks: Which Ones Should You Invest On in 2024?
Which Factors Can Have a Negative Impact on Penny Stock Prices?
These are some of the top factors that can affect the price of Penny Stocks negatively:
Misinformation
Manipulation and misinformation are two of the biggest risks in the way of making fast profits with Penny Stocks. It is easy to use websites and online portals to spread misleading or false information about any stock, in order to increase or decrease price in the market.
It is possible to do this through different methods, such as using bots to artificially inflate the price of a stock or posting fake news stories about the future potential of a particular stock. This kind of manipulation results in major losses for traders or investors who believe the hype and are ready to pay a very high price to buy the stock.
Herd Mentality
The potential for herd mentality is another possibly negative impact of misinformation on penny stock prices. When a particular stock begins to trend on social websites, traders or investors who buy into the hype can rush to purchase it, irrespective of its basics.
This can immediately lead to an artificial increase in its prices. Once the hype begins to subside, traders and investors begin to sell their shares, as the real picture becomes clear to them. This is when the prices of the stocks witness a major drop. The situation is particularly risky in case of Penny Stocks, which are known for their lack of liquidity and volatility. This herd mentality can lead to wild fluctuation in the prices.
Pump and Dump Scheme
Pump-and-dump schemes can also have a major impact on the prices of Penny Stocks. These types of schemes breed wildly in the social media platforms. In such types of schemes, a group of people inflate the price of a stock through artificial means. They promote the stocks on various social networking platforms and then manage to sell them at a higher rate.
Naturally, other investors are left with worthless stocks. These are illegal schemes which can result in major monetary losses for investors who fall for them.
Social media platforms
Social media platforms such as Reddit, Facebook and Twitter have emerged as powerful mediums for information. Investors and traders use these platforms for sharing opinions and information about various kinds of stocks, which include Penny Stocks.
There is a dark side of the effect of social media platforms on the prices of these kinds of stocks. Traders and investors need to be more aware of how social media website can affect the prices of Penny Stocks. In the social media platforms, there is an element of anonymity. Naturally anybody can post as an expert on stock market and dupe investors with misleading information. It is essential for traders and investors to understand that not every piece of information shared or social networking platform maybe true. Many of these can be biased and come from sources that are not credible.
The negative impact of the internet and social platforms on these kinds of stocks is a major concern for investors who are interested in making profits quickly by putting their money on Penny Stocks.
Top 5 Mistakes to Avoid Before Investing in Penny Stocks
These are five important mistakes that you should avoid before making penny stock investments:
1. Not being aware of the nature of Penny Stocks
Penny Stocks are regarded as high-reward and high-risk investments. Naturally, it is essential for traders and investors to be completely aware of the potential rewards and risk before making any decision for investment.
2. Not considering the risk before making investments
There are major risks involved with investing in Penny Stocks, such as difficulty in exiting positions, potential for manipulation, limited amount of information, lack of liquidity and high volatility. Traders should keep these risks in mind before putting their money on Penny Stocks.
3. Making investment decisions based on social media information
Social media is regarded as a treasure trove of information but it is not a credible resource. Various posts and news information on social media platforms can be biased, based on lies, filled with rumors and can essentially be pump-and-dump schemes. Misinformation and wrong opinions can have immediate impact of the prices of Penny Stocks.
Thus, traders need to use these platforms cautiously and verify information before making important investment decisions based on them.
Read on: High-Beta Stocks 2024 – A Complete Guide for Investors.
4. Not consulting financial advisors
Penny Stocks are risky by nature. Naturally, it is important to consult with an expert financial advisor before you allocate any amount of these stocks into your investment portfolio.
5. Not being aware of the external factors influencing Penny stock prices
While Penny Stocks have the potential to give fast profits, the role of external factors in driving up their prices artificially is a multifaceted and complicated issue.
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Conclusion
Many traders are in the habit of buying Penny Stocks without verifying the credibility of the information that they go through. This can obviously result in poor investment decisions and ultimately lead to significant financial losses. It is always important to conduct thorough research and approach news on social media platforms carefully, before making any investment decision.
