Free Investment Advice

In the US stock market, the definition of penny stocks are common stocks that trade for less than $5 per share. These are usually speculative securities of very small companies. In other markets, penny stocks may hold different definitions, often variated by the less than trading price per share or the less than market capitalization amount or both.

Penny stocks are also sometimes known as microcap stocks, small caps and nano caps.

For investors, penny stocks are very popular due to their ability to multiply their values many times over and the fact that they are available at very cheap prices.

For small companies, listing as penny stocks are a great way to finance growth spurts, tide over rough roads and grow the company without the burden of heavy scrutiny companies face when listing on the major stock exchanges.

There are instances where companies are able to leverage on their penny stock status to grow their businesses at an exceptional rate and make bucketloads of cash for their earlier investors.

Penny stock investment is not a short-term investment and you should expect to sit on your investment for a while.

High-Risk

Investing in penny stocks can be extremely high-risk. Some seasoned investors compare the investment of penny stocks to high-risk sports like skydiving and bungee jumping.

Many investors are lured to the possibilities of huge payouts should they lay their bets on the right penny stock. It is every investor’s dream to find the next winner. There have been examples of penny stocks which sky-rocketed several hundred percent of their initial value in very short periods of time. The truth is that huge enterprises were once small businesses. But on the other side of the coin, it is also true that small businesses who eventually make it to the major league are very few compared to those who do not.

Quoting the SEC: ” Investors in penny stocks should be prepared for the possibility that they may lose their whole investment. ”

Just as how penny stocks can multiply their values many times over, severe losses can occur and many penny stocks can lose all of their value in the long term. It is just economics. Businesses fail just as businesses succeed.

High Returns

Investing in penny stocks can have great potential payoffs using reasonably small amounts of money. Take this as an example:

You purchase 10 lots of shares of Company A at $4 per share for a total of (4×100x10)=$4000

Over the next 2 years, the company does exceedingly well and swells to a value of $20 per share. You have just made yourself a staggering 500% return, making a tidy profit of $16,000 in 2 years! This has happened many times and if you place your bets on the right company, the returns can be enormous.
What to Look Out For when Buying Penny Stocks

Understand the Company Thoroughly - This theory holds true when investing in any kind of stock or financial instrument. Understand and study whatever you are investing in thoroughly before taking the plunge. Without doing your proper due diligence, you might as well be buying a lottery ticket. We invest, not gamble. So if you are not sure about the company, simply don’t invest.

Be Wary of Hype - If there is a lot of hype circulating on the internet about a particular stock, be very wary. Fraudsters have become so good at hyping it up that they now make false claims that are in sync with the current market conditions so that whatever it is they are saying sound credible. Conduct your research on the company independantly. If you are unable to find out enough about the company in question to alay your doubts apart from the hype you are hearing, you are better off giving this investment a miss. You might just have saved yourself some money and given the conmen less to gloat over.

Problems Associated with Penny Stocks

Problems associated with penny stocks include limited liquidity, lack of financial reporting, and fraud.

Limited Liquidity - Penny stock companies usually have fewer shareholders. This means that it is less ‘liquid’ and the trading volume will not be as high as a larger company’s. Any sudden change in demand and supply can lead to huge volatility in the stock price and cause its price to fluctuate with great magnitude. This makes the stock vulnerable to manipulation by market makers or management, resulting in extreme insecurity in the company’s stock price. Limited liquidity also makes the stocks difficult to short and sell, since there might be very few buyers on any particular day.

Lack of Financial Reporting - Many companies use penny stocks to scam the less experienced investors. Penny stock companies are not required to open their books and be 100% transparent to potential investors. They do not face the same amount of scrutiny that the larger companies listed on major stock exchanges like NYCE and NASDAQ face and have little to no regulatory or listing requirments.. Very often, dishonest companies make use of these loopholes to run scams on unsuspecting investors.

Fraudulent Claims - Many spam mails and messages litter the internet, making false claims to create the appearance of a huge interest in a stock. These claims are often of a penny stock company coming up with a major positive announcement that will drastically sky-rocket its stock price and they are sometimes made by company insiders who hold major lots of the stock. The facade of a huge interest in the stock sometimes becomes a self-fulfilled prophecy when novice investors believe the rumors and rush to pick up the stock. The company insiders then make a killing by selling off their shares and the investors are left with the scraps.

Should You Buy Penny Stocks Then?

The answer to this question depends almost entirely on your personal appetite for adventure and your willingness to take risks with your money.

There are many out there who firmly believe that in order to gain much, you must also be willing to risk much. This is a way of life for many that holds true for them in love, life, and in money. These people are much more capricious with their money and are willing to take the risk without reservation or fear of a negative outcome. These are the people who do wonderfully, win or lose when investing in penny stocks.

On the other end of the spectrum there are those who jealously guard their nest eggs and bank their retirement security upon the funds going in that basket. These are people that are quite likely to find themselves panicking their way through a penny stock investment for many reasons. You can’t really thoroughly research the companies (a travesty to people who prefer careful planning) and you can’t gain quick and easy access to your funds once invested. This removes some sense of control over you financial health and isn’t a comfortable feeling for investors who like to feel in control. I can definitely relate to those who are in no condition, really, to invest in penny stocks. It’s a frightening investment practice when houses, retirements, braces, and college educations are on the line.

If you are the type to invest in penny stocks without carrying the heavy baggage of worry, stress, and nervous sweats along with you then you may find yourself in the position to change your wealth status. Even if you go against your comfort level and make the investment there is much to gain. Unfortunately the risks of this sort of investment are great as well and should not be overlooked or underestimated. So it still boils down to you and the person you are deep down inside. Are penny stocks right for you? Only you can answer that.