Penny stocks are often dismissed as excessively risky investments that seldom pay off. It should be admitted that there is a lot of truth to this—but with the right knowledge
and tactics, it’s possible to make a substantial amount of money in penny stocks. Having said that, let’s take a look at penny stocks—what they are, their associated pros and cons, and how to go about investing in them.
Basically, a penny stock is one that sells at a low price. Despite the name, these stocks usually cost more than a penny—they occupy a range of prices. Some cost $1, others cost
a fraction of a penny. The Securities & Exchange Commission (SEC) classifies a stock in this category if is it priced at $5 or less.1 Penny stocks are sometimes called micro-cap stocks.
An over-the-counter stock is one that isn’t listed on the
formal exchanges (e.g., the NYSE). Penny stocks often fall into this category, but many do not. Over-the-counter stocks are widely
considered
risky
because they aren’t subject to the listing and reporting requirements of the major exchanges.
Some penny stocks can be found on NASDAQ or other stock exchanges, but a great many are not listed there. A lot of penny stocks are on the “pink sheets”—daily publications of over-
the-counter securities. You can also find them on the Overthe-Counter Bulletin Board (OTCBB). Securities on the OTCBB need not meet the listing requirements of the NYSE or other exchanges, but they must file financial statements with an appropriate regulator (e.g., the SEC).
Inexpensive – Their low price makes these stocks attractive to investors who may not have the funding to
purchase
expensive
relatively
shares
from
large companies. Huge profit potential – This benefit follows from the first. Because these
stocks are so cheap, a slight increase in value can be profitable.
As they’re listed on the pink
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sheets, penny stocks need not follow SEC filing requirements.
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Therefore, investors may have trouble finding an adequate amount of information about them. Additionally, these kinds of stocks tend to be quite new,
with little or no track record that investors can consult.
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Penny stocks are associated with
poor liquidity and an attendant lack of market activity. This means that a trader is more likely to get stuck with a stock they can’t sell.
Lack of liquidity makes penny stocks vulnerable to price manipulation. A trader can easily buy large numbers of shares and temporarily drive up the price to create artificial demand for the stock.
To succeed with penny stocks despite these disadvantages, you must invest wisely.
1.
Do your homework – Beware of shell companies that seemingly exist only for stock purposes. You want to pick companies with solid business fundamentals.
2.
Be prudent – Don’t invest all your funds in a few penny stocks. Remember, these stocks are volatile.
3.
Consult an experienced stock analyst – PennyStocks.com has a free newsletter with a proven record of success!
PennyStocks.com has earned a name as one of the most trusted and dependable research
firms in the field of micro-cap and over-the-counter stocks. The site offers a weekly newsletter and a variety of informational articles.