Devoted to understanding the basics and fundamentals of investing

I am going to interrupt my series on technical trading to answer a couple of questions.  I received an anonymous question about whether I felt penny stocks were too risky.

I personally feel penny stocks are too risky for the average investor.  My reasons follow.

1. There is very limited information available on the companies.  To do an adequate job analyzing them, you need to meet management and visit the company.  It is very expensive and time consuming to reach a level of comfort on the company.
2. Auditors are often local and may lack resources to conduct the same level of audit that a national or global firm might conduct.  The financial information may not be as reliable as you expect.
3. Trading liquidity is rare and may dry up unexpectedly.  If only a few thousand or tens of thousands of shares trade each day, it should be considered illiquid.
4. The firms are often financially precarious and have few reserves to weather storms.  If they hit a rough patch they may sink suddenly.
5. Price volatility in penny stocks is higher than for larger cap stocks.  Hence, the risk is commensurately higher.

If you can address each of these problems or if you can find a fund manager who addresses each of these problems then you are not the average investor and may find the increased level of risk to your liking.