When you think of trading penny stocks, the major stock exchanges normally come to mind. Such as the the New York Stock Exchange (NYSE), the National Association of Securities Dealers Automated Quotations (NASDAQ), or the American Stock Exchange (AMEX).
What exactly is a penny stock?
A Penny stock is a low priced security for a small company with a market capitalization of under $500 million and usually traded in very low volumes and amounts. Penny stocks also trade on other OTC or “other the counter” exchanges, like the OTCBB and Pink Sheets.
Due to the low trading volumes, penny stocks are a profitable investment option that comes with a sizeable amount of risk.
According the Securities and Exchange Commission, potential investors in penny stocks should be aware of the fact that due to the low trading volume of these stocks, it is possible that an investor won’t find a buyer for their shares. Finding accurate price quotations are also difficult making it a strong possibility that an investor can lose their entire investment. This is the inherent risk.
Penny stocks do carry a certain appeal for adventurous investors.
Chances are however, a new investor looking for a potentially lucrative short term investments with a low starting price will run across the penny stock.
The allure and excitement comes from the fact that at such low prices any changes are often measurable in hundreds of percentage points in a given day or two. An investor’s stock value can literally grow to double or even triple the original investment amount!
Conversely, the price of penny stocks can plunge in value just as quickly. New investors would do well to avoid making penny stocks a major part of their portfolio.
Also, due to the low listing requirements on exchanges like OCTBB and Pink Sheets, many companies are not really considered safe investments.
Many of the companies listed on alternative exchanges do not have enough financial history to be able to accurately determine if they would make a good investment or not.
In some cases, these companies that are considered to be penny stocks are either new companies or are in some cases dangerously close to failure.
Unfortunately, some new day traders have even taken to artificially manipulating the stock prices by buying up large amounts of a stock which in turn, convinces individual investors of the need to buy.
As most of these stocks are not in great demand, an investor will have to lower the asking stock price in order to entice an investor, often at a financial loss.
Not every company that trades for “pennies” on the stock exchange should be considered fraudulent, however. Some are simply small companies trying hard to grow their business and are working to get up on the larger market exchanges. Searching through the fraudulent companies to find the truly reputable companies capable of helping an investor turn a large profit may not be worth it.
Investors with low investment income may be convinced that just one good trade can double their investment, but in the end an investor is better off choosing an investment from a company that they have researched thoroughly and are convinced that this company’s stock pricewill grow.
Thank you for reading my article,