Let’s face it — penny stocks get a bad rap in the financial news media. But despite what the pundits tell you, the jabs at cheap stocks are rarely justified. It’s time to bust Five Myths About Penny Stocks.

1.) They’re Riskier Than Other Investments
While this was once true, if you’ve been following the economy recently, you know that’s no longer the case. In an age when blue chips like AIG or Lehman Brothers can swing just as wildly as the crankiest penny stock, even the big names are no sure thing.

To be fair, penny stocks are far from risk-free. But it’s that risk that brings with it the reward potential penny stocks are known for.

2.) They’re Hard to Buy
Just in case this myth wasn’t busted when I wrote Taming the Wild West of the Market back in May, I’m back to reiterate.

Buying penny stocks isn’t necessarily any harder than buying another type of investment. You just place a trade with your broker, or purchase the shares through an online brokerage account, and watch the magic happen. Your broker might have a different commission structure for penny stocks, so as always, it’s best to ask your broker about how trading penny stocks will affect your brokerage account.

3.) You Have to Be An Insider to Make Money with Penny Stocks
Believe it or not, being an insider doesn’t garner you much of an advantage as a penny stock investor. That’s because Wall Street is way to preoccupied with more expensive stocks to give penny stocks a second thought.

4.) OTC Stocks Aren’t as Legitimate as Blue Chips
Don’t think that just because a stock isn’t traded on a major exchange like NYSE or NASDAQ that the company is somehow defective.

In fact, the opposite can sometimes be true. Exchanges like NYSE have burdensome listing fees and requirements that preclude smaller companies from getting listed. Some of the most compelling investment stories were those of small companies listed on over-the-counter services like OTCBB or Pink Sheets.

And don’t think that OTC stocks are any more prone to fraud than listed companies are. Stocks listed on services like OTCBB and OTCQX have heightened listing and disclosure requirements over the past decade to help keep things transparent for investors.

5.) There’s No Place for Penny Stocks in My Portfolio
If you think that penny stocks don’t belong in your portfolio, maybe you should take a second glance at what your investment objectives are. While penny stocks have traditionally been riskier choices than their listed counterparts, today’s stock market is bringing that precept into question.

Most portfolios have at least some room for higher-risk/higher-reward investments like penny stocks. That’s especially true if investing in penny stocks doesn’t impinge on your retirement money.

Cheers,
Jonas Elmerraji
November 7, 2008

Jonas Elmerraji

Jonas Elmerraji is an editor of Penny Stock Fortunes and a frequent contributor the Penny Sleuth. Jonas also occasionally writes for financial publications like Forbes, TheStreet.com, and Investopedia. He has been quoted as an investment expert in Investor’s Business Daily, Consumers Digest, and Bankrate.com among others. Before joining Agora Financial, Jonas’s held positions at an investment firm and at a “Big 4″ public accounting firm. He holds a degree in Financial Economics.

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