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.
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.