The problem is that the original intent of these types of stocks was to help established companies grow when they lack the means through regular channels. What most do is fund everything with it. How's an investment supposed to grow when out of the gate, the very first thing that happens is dilution, followed by more dilution and even more.
Here's what I usually see in the pinksheets:
1. Investors want to get into low priced stocks because they think they can make a better return than anywhere else. That's not true. What they're doing is buying the shares the company or whomever is selling. The shares cost nothing and they get money in return. That tanks the stock price as each share dilutes what little value the company has anyway. Then you're stuck.
2. People then think they can average down. Get the average down and it'll make it easier to get rid of the stock. You end up stuck with more shares and a bigger loss.
3. The price starts moving up. Now people are thinking they can break even or get out with a smaller loss so they hold. The pump is always met with a dump. Stuck again for getting greedy.
4. People are afraid a penny stock will run so they invest instead of trade or watch. Investing in them is a guaranteed loss. Penny stocks don't build up equity, they run losses to guarantee it, accrue salaries and other expenses to make sure the "owners" get their cash. I say "owners" because no pinksheet board of directors ever has a neutral party representing common shareholders. Shareholders never have controlling interest.
5. People get upset when they miss a run so they invest and hold. Well, if you miss a run you don't lose any money just potential. If you're holding and miss the run (because you weren't looking) you're probably looking at a loss.
There'll always be people making donations to these companies. Many see this as an exchange for cheap stocks when it's only just a quote service that requires no transparency. Most have no idea what the rules and regulations are and assume it's just like a big board. I've heard people say time and time again that penny stocks are just a lottery, win or lose. Lotteries aren't fixed, though. And if you add up the cost of lotto tickets over time, even if you hit you're still negative. Same happens here.
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