Many penny stocks are highly volatile, and there's often little guarantee the company behind those stocks is legitimate. A little risk is healthy for your portfolio, but with many penny stocks, it's just plain dumb.
Penny stocks have become a breeding ground for pump-and-dump schemes that artificially inflate a holding's value before selling out. The fraudster turns a huge profit, but the investor is often left with nothing.
And yet blissfully unaware investors flock to the space, hoping to make millions out of a small initial investment. The internet is rife with entrepreneurs who promise to turn your $500 into $1 million trading penny stocks alone.
But a simple Google search of "penny stock fraud" narrowed down to the last year yields scores of reports of criminal activity, indictments, lost fortunes and jail time related to super-small-cap stocks. If you're still hoping to make your fortune in penny stocks, you're one of the dumbest on Wall Street.