When people first get interested in the financial markets they typically ask are penny stocks a good investment? The straight forward answer is quite simply NO. If you decide to invest in penny stocks for more then a few days, you can most likely kiss your precious money good bye. Penny stocks are a horrendous long-term investment because they provide no cash flow (dividends) and these companies are lacking the ability to create profits. Shareholders should be compensated with either dividends or price appreciation due to earnings or future expected profits but nearly every penny stock you see will never provide this. Companies take their business to the public markets to raise funds for their future capital expenditures but then they soon realize the penny stock market is a no win situation. Their choices are to give up and go bankrupt or to continue issuing additional shares to be able to continue operating their business. It is this dillution which hurts shareholders and causes downside in the stock price. This situation is basically common to all penny stocks except in the case of complete frauds.
People think that just because a penny stock company announces a deal with a real legitimate company or with a government organization, that the information MUST be legitimate. The fact is you can go online and spend as little as $180 to issue a press release on PR Newswire which will be syndicated to hundreds or even thousands of websites online. Many of these penny stocks are being manipulated by stock promoters which are operating outside the US where US laws do not apply. These companies litterally make up news stories which can cause large price spikes in stocks. As your self why if penny stocks are a good investment would a company want to do this? The reason is greed. The stake holders or third party investors are looking to run a pump and dump and want to take advantage of as many suckers as possible in the short window of time before people realize that the article is bogus.
When people ask are penny stocks a good investment they usually ask about sub penny stocks. Stocks in this category trade below 1 cent per share and have extremely tiny market caps of usually below 25 million dollars. These stocks are certainly the worst of the bunch because of their wild price swings and complete lack of any trading volume. In general avoiding sub penny stocks will be a great way to minimize some of your risk and prevent loss caused from stocks which are not liquid enough.Often times though if you search online you will find meassage boards like Ihub.com where thousands of people are talking about their investments in these sub penny stocks. Even if you answer their question are penny stocks a good investment they still will ignore you because the type of people that post on these useless penny stock forms are just gamblers in it for the rush.