Friday, July 9, 2010

Penny Stocks are any stock that trades below $5 per share. Most financial advisors and long-term investors tend to avoid them completely because of the extremely high risk that comes with owning them. They generally tend to fluctuate wildly in price, and although some report spectacular gains in a matter of a few days [or even hours], those who invest in them are generally surprised when they disappear altogether.

Penny stocks are basically low-priced stocks that sell for anywhere from $1 to $5, and are generally considered speculative. The term "penny stock" (also called microcap or small cap stock) is most commonly used for the stocks priced at under a dollar a share. You will not find companies such as Wal-Mart or Microsoft in the penny stock section, but remember – they were small companies too once upon a time. The savvy investor must look upon penny stock investing as a challenge to find "the next big thing."

Unfortunately, the penny stocks are not the ones covered in sources such as the Dow Jones Utilities Average, the S&P 500, the Wilshire 5000, and the Russell 2000. One great resource in the Reference section of your library is the Walker's Manual of Penny Stocks, now in its third edition, which takes a look at 500 companies that may be good risks if you are interested in penny stock investing. Your broker or financial advisor is also a good resource for information. 

Where do I go to buy a penny stock?
Most penny stocks trade in the "over-the-counter" market (OTC), and are quoted on the OTC systems such as the OTC Bulletin Board (OTCBB) or the Pink Sheets instead of with the NASDAQ or New York Stock Exchange. Before buying even one share, be sure to check out the company's financials. If the company is registered with the SEC, you will find their financial statements on the SEC's website. If a company is not registered with the SEC, check with your state securities regulator before investing. 

What should I look for in a company selling for $5 or less per share?
The same thing you should look for in ANY potential investment: quality, not quantity. Sometimes all you have to go on is whether or not a small company has the potential to turn a profit. Once again, do your homework. Find a company that is small yet profitable, has sound growth potential, and could yield significant gains over time. Other things to look for: the company's valuation, existing revenue stream, financial solvency, longevity and history, profitability, and number of employees. 

What are the pitfalls of penny stock investing? 
Because many of these companies are too small to file financial reports with the SEC, false and erroneous information is often the only kind available, which leads to a large amount of fraud being committed. The lack of public information, no minimum listing standards, and risk are the biggest deterrents to investing in penny stocks. 

How do I get started in investing?
All investing starts with the same thing: careful consideration and study. Check out books from the library on the subject, take classes, do some research online, read financial magazines or newspapers do some kind of preparation to make sure you understand what you are getting into before you write any checks or transfer any funds. If you still aren't comfortable with doing your own investing, you can always call a professional to help you.

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