The answer to the question "are penny stocks safe investments?" is a big "no." Penny stocks may sound like an attractive investment option because they're so cheap (the term "penny stocks" actually refers to stocks trading under $5 per share), but they are considered very risky for some very important reasons.
A company that's trading penny stocks is typically either a very young company that's trying to get off the ground, or a company that's been an almost complete failure and is on the verge of bankruptcy. The problem with determining whether it's a new company with no track record or a more established one with a bad track record is that penny stock companies are not required to disclose as much information as companies that are listed on the big stock exchanges, like the New York Stock Exchange (NYSE) or NASDAQ. Companies registered on those exchanges are required to meet stringent criteria concerning not just performance and earnings but also transparency and accuracy in describing their financial position. In fact, one of the main risks in buying penny stocks is that you could hear gross misrepresentations of a company's current fiscal health, and not be able to find out the truth until it's too late. Companies trading in penny stocks will also try to create false word of mouth about their fiscal health, in order to get you excited about their potential for growth. Many of the people and brokerage houses touting these penny stocks are also located offshore.
It's important to know what you're doing when it comes to penny stocks. Many people see them as a way to get in on the ground floor of some company that's about to really take off, and so buy their stocks while they're cheap, and hence make a fortune. If this happened with any frequency you can be sure that trading in penny stocks would have a more respected reputation than it currently has now. So, be sure to consult with a financial advisor before you put your money into penny stocks.
