Interested in investing in penny stocks, it is time to figure out: What is a penny stock?
The term “penny stock” has gone through many changes and in the past referred to stock shares that were sold at less than a dollar each.However, the definition has been altered to cover all stocks which are sold below $5. As a matter of fact, stocks selling at this range are considered to be high risk and represent stocks of firms which have cash constraints and hard pressed of other important resources which are required by any commercial enterprise.
Because penny stocks are sold by companies which have limited financial and other resources, they tend to receive low attention from potential investors. In most cases, the shares of these companies are sold on Pink Sheets and OTCBB and have high levels of susceptibility to market conditions. There are many forms of manipulation which take place in the stock market and these affect the penny stocks more than any other kind of stocks.
So, that begs the question: Should you invest in Penny Stocks?
Penny stocks are not only highly speculative but also very risky. Remember, though, that with risk comes reward. Although these stocks carry high levels of risks, they also have the potential of making huge gains pretty quickly. There are thousands of traders who have made quick profit gains from penny stocks trades. So if you know what you are doing, and know what NOT to do, there are higher chances for you to make a decent amount of money quickly. You can reap huge rewards from the penny stocks market if you know what exactly to do and if you exercise proper timing.
Any share of any company which fails to make above the $5 cut will not go to the normal stock exchange market, but instead be listed on the penny stock exchanges. Interestingly, these penny stock companies represent a bigger percentage of the companies throughout the U.S. than those listed on the major stock exchanges. This kind of share will trade in the penny stocks market until the time when it qualifies to trade in the major stock exchanges. So, how is this determination of the $5/share price made? In simple terms, this represents the total value of the shares of the company. For example, a penny stock company which has five million shares that sell at $2 has a market capitalization of $10 million.
To comprehend how penny stocks can actually make money here is a simple example. You have $2000 to invest in shares, but you discover that each share of the firm you are interested in is worth $200.This means that you will just have 10 shares to your name. If these stocks gain $1, you will just have made a profit of $10.But if you buy penny stocks worth $5, you will have 400 shares. Assume that each share gains just $0.5, you will have made a clean profit of $200.This is a simple example of how penny stocks can at times become a lucrative and profitable investment. Before you invest in penny stocks, it’s important to ascertain the risk level which they carry. Although there are higher probabilities of making great profit, the possibility of huge losses is also real.
Lastly, it is important to note that penny stocks represent new and upcoming business ventures which are yet to have large market capitalization.There are many penny stocks that have “graduated” to become huge players in the stock market and among them include such companies as Intel, Bank of America and many more. That’s why I really like penny stocks: you get the chance to invest in the new, up-and-coming adventurous companies, and have the opportunity to help them become great!