What Are Penny Stocks?
Penny stocks refer to any stock that is traded for less than $5.00 per share, even as low as $0.01 per share. Not only this, a genuine penny stock is supposed to be lower than $4 in terms of tangible assets (net), and must also not have a marked functional image. Therefore, if a company is into a significant business along with a good amount of real assets, then it is not categorised as a penny stock company, although its shares may be very lowly priced. Penny stocks are very speculative in nature and thus have a very high risk factor attached. As a result most long term investors prefer to avoid them. Although they show volatile price fluctuations, many people who have invested in penny stocks are quite happy with the short term spectacular monetary gain they have earned. Penny stocks are also notorious for disappearing altogether. The high risks and the high gains of investing in a penny stock arise because they have a very small and limited market. Penny stocks are no more listed on the important stock exchanges, and as a result they are traded either on OTCBB or the Pink Sheets. People tend to invest in penny stocks, because they allow an investor to buy a big number of shares with a small amount of capital.
Why Do People Trade In Penny Stocks?
We all know that penny stocks are much riskier than blue chips or mutual funds, but if one can hit the right company, then nothing can beat the returns. Some penny stocks have even traded from about 50 cents to an unimaginable 25 dollars in a very short time span. The biggest advantage of buying a penny stock is that you can get unimaginable gains in a very short period of time. A company that has a stock price of $2.00 can double or even treble its stock very easily in little time (even days), as compared to a blue chip company. Moreover, if the numbers plummet, then one tends to lose relatively much less in a penny stock as compared to the shares of a mature company. Microsoft was once itself a penny stock company. In times to come, these penny stocks will turn out to be the giant companies of US, and people have realized this. Why Do Smart Investors Shy Away From Penny Stocks? Prudent investors generally do not invest in stocks that trade very low, because they have an inherent risk of losing their listing on a stock exchange. This means that the company might be on the verge of a financial crisis or even on the threshold of bankruptcy. Smart investors tend to avoid this kind of a risk. Moreover, penny stocks are also traded on a very small volume daily, as compared to the more mature markets. As a result, many investors may not be able to trade at all on a particular day. Penny stocks are definitely worth investing, since they help you learn the basics of trading if you are a beginner in the stock market. You never know - if you are able to find the right company at the right time, you may make riches overnight. But, nevertheless, one must not forget the inherent risks attached to a penny stock while investing capital into it.