Penny stocks are bad news. You could call them the scratch-off lottery tickets of the stock market, but that would be an insult to lottery tickets.
It’s not that penny stocks never represent legitimate companies that go on to list in the big leagues of a major exchange. It’s just that almost all of them — even top penny stocks — don’t.
By trading over-the-counter, penny stocks have no listing requirements. A lack of Securities and Exchange Commission oversight means that companies trading as penny stocks don’t have to release financial reports. And when they do, the statements aren’t audited.
More worrisome, the low nominal prices and lack of liquidity can make penny stocks a playground for pump-and-dump scammers. When the SEC warns investors that penny stocks are speculative investments in which you could lose everything, it’s being too generous.
And yet folks are interested in penny stocks. The low nominal prices and huge price swings appeal to something primal in people: greed. Penny stocks have the allure of get-rich quick schemes.
But even the top penny stocks — penny stocks that jumped more than 20,000% for the year-to-date — would not have made you a millionaire. Just have a look at three top penny stocks of 2013 to see why: