If you’ve paid any attention to the financial markets in recent years, you know that there has been a fair amount of turmoil. Much of this turmoil has come in the form of changing prices in the major stock exchanges. Everyone talks about the volatility of the New York Stock Exchange and the NASDAQ on a daily basis. While these areas of the stock market are what most people focus on, there are many more stocks outside of this realm that have a huge impact on the economy. Penny stocks make up many of these other agents of influence and can be an attractive alternative to the major stock exchanges for the average investor. While you may be somewhat familiar with penny stocks, you may not understand how they work or what they have to offer you as an investor. Here are the basics of penny stocks and why you might want to consider putting some of your investment capital into them.
Penny Stock Basics
A penny stock is not necessarily a stock that you can trade for a single penny. This is a slang term that includes any stock that trades for a small amount of money. The official definition varies from one source to the next. Some call any stocks under $5.00 per share penny stocks, while others say that penny stocks are any stocks that trade for less than one dollar per share. The official definition is not as important as the practical one. A penny stock is one that you can buy a share of for a small amount of money.
Penny stocks are not traded on the big exchanges like the New York Stock Exchange and the NASDAQ. Instead, these stocks are traded on the Pink Sheets system or on the Over-The-Counter Bulletin Board or OTCBB. There are a number of different computerized networks that allow investors to trade these stocks outside of the major stock exchanges. The Pink Sheets is a daily publication that publishes the bid and ask prices of most of the stocks that are publicly traded. Investors can work with market makers who trade these stocks in order to buy and sell them.
Many companies trade on these exchanges. You don’t have to have a small company to have penny stocks. Some very large companies have stocks that are considered to be penny stocks and trade on these exchanges. In order to be included on the NASDAQ or the New York Stock Exchange, your company has to meet some very strict criteria financially. If a company doesn’t quite meet those qualifications, it cannot be included on one of the exchanges, but it still could be a perfectly good company to invest in and it still needs somewhere to trade.
Why They’re Attractive
You may be wondering why you should invest in penny stocks. While there are a few potential advantages of doing so, the main advantage is that you can accumulate a large number of shares of a company for a relatively small investment. When you have a share, it gives you the potential to benefit from increases in value of the company. When you own hundreds or thousands of shares in the stock of a company, it means that you can realize a big gain when the price of the stock moves, no matter how slight a change.
If you own a few shares of stock in a big company in which shares are priced at $50 a piece, a $1.00 increase in the price of the stock price probably isn’t going to make much difference for you financially. However, if you have shares of stock in a company that are priced at $1.00 each and the price goes up $1.00 per share, you’ve doubled your investment. This means that it doesn’t take much movement in the market to give you a big increase in the value of your investment.
Another attractive feature of investing in penny stocks is that you can sometimes get in before a mass of investors comes along. With most penny stocks, you’re not going to find much media coverage or analysis from the experts. Instead, you’ll have to do your own research in order to figure out what companies to invest in. In the major stock exchanges, the prices of shares can be manipulated greatly by the market sentiment. When an analyst gives some attention to a company, investors might follow the crowd and buy shares of that company, which can artificially inflate the share price. As an investor, this could help you or hurt you. In the penny stock market, there is not as much of this going on. Prices raise and lower based on what the company actually does instead of just on what some analyst behind a desk says about a company. This makes it easier to actually analyze a company based on its merits instead of based on perception.
Risks
While putting money into penny stocks can provide you with some definite advantages, it is not without some risks. For one thing, companies in the penny stock market are not regulated by the Securities and Exchange Commission as closely as if they were on the New York Stock Exchange or on the NASDAQ. Because of this, they do not have as strict requirements when it comes to putting out financial statements and handling their accounting. This can sometimes lead to misleading information or inadequate data being presented to investors. When you are trying to make assumptions about company, it helps to have all of the data that should be available to you. Without this information, you may not be able to make an educated decision.
Another potential problem with putting money into penny stocks is that the volume of shares available is relatively low. Most companies that trade in these markets only have a few thousand shares outstanding instead of the millions of shares that are available on the market for bigger stocks. This means that if anything related to the company happens in the news, it can make the price shoot up or down very quickly. This adds some level of volatility that you have to deal with as an investor. Some investors like volatility because it means that they can make a large amount of money in a short period of time. Others are scared of volatility, because it means they can lose most of their investment overnight.
Considerations
Investing in the penny stock market is definitely not for everyone. If you are the type of person who likes to speculate on investments that are outside the mainstream, this might be an option for you to consider. You can make a lot of money in a short period of time, but remember the risks. If you’re the type of person who likes to dig and do research on his own, penny stocks can be a very valuable investment area to get involved with. Let Penny Stocks 1-2-3 help you with our newsletter, full of helpful information and recommendations on hot penny stocks.