Investing In Penny Stocks

One of the great business propositions for making is through buying and selling of stocks. In these times of financial crisis and share market slowdown it is important to know about the companies whose shares are to be bought.

Most of the people are going for Penny stocks, since the markets are working erratically. These are small stocks which are available at less than two cents a share and are traded over the counter. Many novice investors get influenced by the appeal of a penny stock because of their low price and their chance for rapid growth which may be as high as hundred percent in a few days. Many big companies do sell their shares at 4 to 5 dollars per unit; however, it is important to keep good information about such companies and their workings in the market setting.

Since the beginner investors are not aware about the market forces and the current situations they can start by investing in cheap penny stocks. This would reduce the risk factor apart from keeping the earning possibilities open all the time. This rule also stands true for people with limited capital resources.

SEC also warns the learner investor about penny stocks being high risk investments and that they are well aware about the risks involved. It is advisable to have a working knowledge and understanding of penny stocks and the penny stock market in order to be successful in penny stock trading.

Another advantage of penny stocks is that these shares are traded over the counter bulletin board (OTCBB) or with pink slips.

The terms penny stocks, micro cap stocks, small-caps and nano caps are used interchangeably though they differ in their definitions. Micro cap stocks are usually classified based on their market capitalization where as penny stocks are valued in terms of their price. It is difficult to find information pertaining to micro-cap stocks and if some is available then it is not from credible resources.

The companies which are mentioned on the pink slips cannot be listed with SEC and therefore, the information about them is not publicly scrutinized. Minimum standards act as safety pillow for investors and yardstick for the companies however there are no minimum standard requirements for the stocks on OTCBB or pink slips to remain on the exchange.

Unexpected changes in demand or supply of penny stocks can lead to volatility in the stock price, which can go up or down. If a situation when there are no buyers low level of liquidity can also make it extremely difficult to sell a stock. Lack of liquidity and volatility also makes penny stocks much more exposed to manipulations. The easiest way to do so is by buying large amounts of stock, plugging them up and then selling them after other investors find it attractive.

SEC treats penny stocks as an easy target for fraudsters due to lack of available information and poor liquidity. Therefore, it is important to be careful of mails that flood the inbox everyday with advertisements from companies promising to sell profitable cheap shares.