Getting started in the world of stock trading can be intimidating and outright risky. But the good news is that there are some ways to get started very inexpensively, which means that there is little risk involved. One of those methods is penny stocks.
Just as the name implies, penny stocks are very cheap, in fact they can be purchased with pennies per share. Because the shares are bought so cheaply, any growth can mean a relatively high return on investment. But on the flip side of that, these stocks can also lose value quickly, resulting in capital loss.
The greatest challenge in investing this sort of stock is determining which ones are worth the investment. Going by standards set by the Securities & Exchange Commission (SEC), any stock under $5 is a penny stock. However, definitions can vary and in some cases the cut-off point is at $3, and there are others that consider $1 the cut-off point. In addition, any stock that is trading on the Pink Sheets is a penny stock.
The four main issues with penny stocks are:
1. Lack of information
2. No minimum standards
3. Lack of history
4. Low level of liquidity
In general, there is little information to be found on these stocks, and the information that is available is typically not from reliable sources. That makes it more difficult to make an informed decision before making a purchase.
The fact that some exchanges have strict standards provides some help in determining safe buys/investments. However when it comes to penny stocks there are few if any minimum standards. Many times when a company cannot maintain a position with a major exchange it will move to a smaller one. This increases the risks in this type of stock.
Most companies listed on these smaller exchanges are either newly formed or they are approaching bankruptcy. Because the history or track record is poor or none existent it is difficult to pick the right stock.
The low level of liquidity of these stocks makes it difficult to find buyers – particularly at a good price. This also makes it easier for some traders to ‘pump and dump’ the stock, by buying large amounts, hyping it up, and after other investors are attracted, selling it. This manipulates the stock prices and someone always loses.
Buying penny stocks is definitely risky. The fact is that most of these stocks do not succeed which means there is a high probability that investments in them will result in losses, but if you do your homework and seek professional assistance, you stand the chance on making a mint..