What are Penny Stocks?

What Are Penny Stocks?
By admin | Tuesday May 11, 2010 02:23 am

In general term, penny stock refers a form of stock, which trades at a low price subject to market capitalization outside the bounds of majority market exchanges. To be more precise, these are the kind of stock, which bears a highly speculative nature and is prone to high risk due to lack of liquidity, large bid-ask spreads, low level of capitalization, limited following and disclosure. The penny stocks are often traded by means of pink sheets or OTCBB (Over the Counter Bulletin Board)

It is difficult to find a definition for Penny Stock, which is widely popular; this makes the term a misnomer in itself. Many people consider a penny stock to be a kind of stock that trades under $5; while on the other hand several others take it as one of the major market exchanges. Hence confusion might follow at any time, because there are both large companies standing on the basis of capitalization in the market trading below $5 per share and umpteen very small companies trading for $5 or more.

The high risk factor guarding penny stocks is absolutely true but the idea prevailing among the investors about the low returns is absolutely wrong. Penny stock indeed has great potential to earn high profit.

There have been several instances, which have proved that penny stocks can very well out perform the blue chip companies leaving quite a margin. The main reason behind this is that the big blue chip companies move at a very slow pace irrespective of going upward or down ward.

The only thing to be remembered while going for a penny stock is to make the perfect choice and if you can do it then the gain will be as best as going for expensive stocks, like, Coco Cola, McDonalds, Google and several others. The advantage you will derive by investing in the penny stock is that your amount of risk for each of the stock is less.

Let’s describe it now with an example,

Say you have $1,000 to invest in a stock a stock. Therefore, it is possible for you to buy $1,000 each costing $1. So, in case your $200 goes up by $5, you can gain $25. If it is a penny stock and if it goes up to $0.05 then the gain will amount to $50. Although this happens to be a made up instance but it is true that penny stock will gain you more money over a shorter period of time in comparison to expensive shares.

Thus, penny stocks turn out to be one of the secrets nurtured by the investment domain with great care. As penny stocks happen to be cheap indeed so it is relatively safe to look for a penny stock with a solid base and risk $200. Many of the penny stock companies turn out to be attractive options as buyouts for other bigger companies and thus the profit of the investor increases. If you are still not convinced then just visit MSN or Yahoo and create a portfolio. There you can pretend as a buyer or seller of stock. This will enable you to try your hands on some penny stock even at no risk. Then buy some blue chip too and have a comparison of the outcomes.

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