Devoted to understanding the basics and fundamentals of investing

If you have an email address, there is a pretty good likelihood that you have received numerous tips from spammers telling you of the next great penny stock you could make a fortune on. I know I have to delete dozens of these types of emails each day. A penny stock is defined as any stock that trades under $5 a share. The majority of penny stocks trade on the OTC BB or pink sheets. There are a number of reasons I believe it would be prudent for investors to stay away from penny stocks.                                                                      

Penny stocks almost all trade over the counter, which means that the company likely can't qualify on a major exchange or simply doesn't have the money. The number one reason to stay away from penny stocks is there is absolutely no accountability necessary for these companies. There are no accounting standards for companies trading over the counter and there is either very little or no financial information reported by the company for you to track the company.

Penny stocks are driven almost purely by hype and manipulation. The reason there are so many people spamming everyone with penny stocks is they know if only a few of those people buy that stock they are advertising, they will profit handsomely. The risk in penny stocks is tremendous.

The most obvious reason for why you should stay away from penny stocks is that you are highly likely to lose money. An interesting article I found when looking up penny stocks came from the Motley Fool. In this article it says that statisticians have found that over 75% of companies whose stock currently trades for $5 or less a share will be bankrupt within the next ten years. Are these really the companies you want to be putting your hard earned money in? I definitely do not.

Penny stocks come with lots of promises of great returns, but are the most risky type of stock one can buy. The risk is far greater than the potential reward in this area. You'd be wise to stay away from penny stocks.