What are Penny Stocks

What Penny Stocks Really Are

Penny stocks are shares that usually trade at a price of at or below $2.00. Of course these definitions vary and some companies, and also the Securities and Exchange Commission, consider penny stocks to anything up to and including $5.00 although this is quite high and nearing the level of the mainstream values at which most trading is done.

When the shares start to reach this level the volatility that is both the upside and the downside of trading in penny stocks, becomes less. And so does the potential for large gains, and losses.

The prices in fact can be, and often are, substantially less than these dollar shares. Many shares trade at price of only a few cents, although that doesn’t mean that they are worthless. In fact on the contrary penny stocks if handled correctly can be one of the greatest investment opportunities on the stock market. They can also be one of the most volatile, though this may be a part of the appeal.

This means they have the potential to make huge profits, as well as huge losses, very quickly and this can scare off most investors who are looking for a more stable income with a good steady capital growth. But if you have the nerve and the know how Penny stocks work, then perhaps better than any other type of investment penny stocks have the ability to make you very rich very quickly. But get it wrong and you could lose everything.

There is an old saying that you have to "speculate to accumulate" and this is very true with penny stocks. If you prefer a low risk investment then they are not for you. A low risk investor would be far better off with a safe but potentially less lucrative market such as bonds high interest savings accounts or real estate. Even "Blue Chip" investing carries some, albeit lesser, risk although they also provide less potential for greater returns.

Penny stocks are more liable to large swings of fortune; for example when a small biotech company makes a discovery that may potentially be of use to the big pharmaceutical corporations they may suddenly go from just a few cents to dollars a share. However the potential is always there for a company traded as penny stocks to go the other way just as quickly.

For instance the same bio tech company thinking they have made this wonderful discovery attempts to get a patent only to find out that someone was there before them. This not only places them back to where they were before but dents investors confidence in them so badly that everyone sells and the price drops down past the original level and the penny stocks investment is all but wiped out.

Many of these companies are still quite new when traded as penny stocks and one of the problems that arises can be a lack of information on which to base your decisions. This general lack of knowledge through mainstream sources can be by-passed if you think there is a good investment opportunity by going direct to the company themselves. With a new company this can often, in the absence of any hard data, be a good way to access facts and figures on patents, sales, research and development etc.

There is no amount of knowledge about penny stocks or market trends (although this can also be useful) that will take the place of good research and it is your money that is at stake. So take your time, do your research; ask questions and if you are still not sure keep your checkbook shut. There will always be another opportunity later to invest in penny stocks so take good care of you money.

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