Why are investors afraid to buy Penny Stocks of startup companies?
Penny stocks are differently comprehended by the investors. The major two problems with these stocks are the lack of information available & poor rate of liquidity. These issues make the micro-cap groups prone to frauds.
You might have heard a lot of new companies arising in the market and displaying their fake recommendations through different media: Financial TV channels, radio, newsletters, emails, press releases and many more. These activities create a false picture in the mind of investors and they feel like investing some amount in those new groups. This is the trap influencing the price of the stock and frauds the innocent people.
The investors trusting the new companies have a few examples of the companies which were penny stocks and turned out to be billionaires. However, they forget to understand that those companies were only 0.1% among the range of micro caps which either were bankrupted or had an association with frauds. Off-shore broking is another regulation by SEC which permits the companies to sell stocks to foreign investors (outside the US) and those offshore brokers sell those stocks back to the US with a profit. The manipulative brokers use these tactics to purchase stocks.
Everyone aspires to become rich and the examples of historical pennies turning into billions make them greedy to buy the new stock options. The initial market price of penny stocks is low and when the investors look at the percentage of returns, they get convinced to make the purchase. Some companies listed on OTCBB and Pink Sheets might be appealing. It isn’t a lie that a very few startups look forward to making their way to reputable blue-chip stocks market.
Penny stocks of new companies are included in the high-risk area due to volatile and speculative nature of the stocks. The potential of new companies might be strong and careful fundamental analysis from investors can lead towards their smooth investments. The fundamentals of a new company are difficult to check. It is not only essential to check the variation in stock prices but the company’s policies and details should be confirmed before making the investment. The potential gains and fundamental factors need to be examined in detail.
Industry Life-Cycle Analysis of Companies
It is not easy to check but a startup person loses the most by not checking the life-cycle analysis of a company. For example, in the present phase, there are a large number of biotech or resource companies arising with high initial costs of establishments and no-sales. These are speculative stocks which need to be examined deeply before investing.
Management & Policies of Startups
The key to a successful company is its management. A strong management can turn a new launch to a high-segment industry. The ethics and experience of higher management can add to the sense of security. The new companies should be given a chance but it should be fair enough to prohibit losses of investors. The smart move of investors can actually make them gain huge profits by investing in newbie companies.