Penny Stock Investing Basics- When it comes to
investing in the stock market it is always smart to do your research before you
purchase anything. By taking the time to learn what types of stocks there are
available, what type of investment is going to be right for you, and where to
get started you can greatly increase your chances for success. A very common
beginner stock so to speak is the penny stock.
What is a Penny Stock?
Though the name seems
somewhat self-explanatory, it is not exactly what it might seem. A penny stock,
or micro-cap stock as it may also be referred, is any stock that costs less
than $5 per stock. In order for a stock to be considered a micro-cap it must
have a cap on market capitalization of $50-$300 million. Though others may
consider stocks that are $3 or less or even $1 or less a penny stock, $5 USD is
a good cut off point for understanding this principle. In general, any stock
that is being traded on pink sheets or over the counter bulletin board (OCTBB)
methods is going to be considered a penny stock.
Why Are Penny Stocks Risky?
Penny stocks are a
great way to invest a little bit of money without using up your entire
portfolio but there are some characteristics of these stocks that make them a
bit risky for the inexperienced investor. For starters, these stocks are coming
from companies that generally do not have much information for the public.
Since these companies are trading on the pink sheets, they are not required to
file with the Securities and Exchange Commission (SEC) which means that they do
not have to release information to the public. Those that are traded on the New
York Stock Exchange or the NASDAQ however are required to release a great deal
of information to the public so you are going to have a much better idea of how
these companies operate and spend their money than you would with penny stocks.
Secondly, there are
no minimum standards for these companies. This means that they may not be up to
the high standards of larger exchanges and that is why they have moved to the
pink sheets. Timely document filing is not required and that may cause issue
for some investors that use these standards as a safety net of sorts. Still
another issue is that many of these companies that are trading in penny stocks
are going to be very new companies which means there is going to be little
trading history to go on. You may have information for a very limited window of
time but you are not likely to have a great deal of information at hand.
Lastly, these stocks
have a very low liquidity level which means they may be difficult to liquidate
and sell. These low levels can also give traders a chance to manipulate prices
which is ultimately bad for investors. When you are thinking about investing in
penny stocks, take your time to find out as much as you can about the company
you want to invest in before you jump.
How to Invest Safely in Penny Stocks?
The best way to
invest in penny stocks safely is to find a trader that is experienced and that
can help you decide what is going to work for you and what is going to work
best. These traders will help you to invest your money wisely and will help
collect the information you need to make smart decisions when it comes to
investing your money. Though penny stocks can be very dangerous if not handled
properly, they can also be very lucrative when you have a smart trader on your
side that can help you properly invest.
Conclusion:
Though penny stocks are
very risky, the payoff is also very impressive. Since penny stocks have a high volatility
one needs to give more time doing due diligence finding right stock to make
money off them. Also one should have a
clear understanding between blue chip and penny stocks.
