Penny Stocks are sort of becoming a craze nowadays, because the profit earned on them are much higher, compared to mature stocks. A penny stock can easily increase in its value from about $0.50 to $2.00, in a very short time frame, but it might take several years for a blue chip stock to increase in value from $30 to $200. The rate of return is very attractive on penny stocks, and people have become rich by investing in such stocks.
Penny stocks are a very attractive investment channel for the short-term risk taker. After all, higher the risk, more attractive is the return. If you are not averse to risk and believe in getting your investment out quickly, then penny stocks might be the right investment channel for you. Mature stocks take many years to double in their value, whereas on the other hand, penny stocks double in value much faster (sometimes even days). A word of caution here – while investing, one must be aware of the risks involved, and decide very cautiously, as to which penny stocks he needs to invest in. This is so because, penny stocks are very well known for disappearing altogether, and you might land up losing your money.
Another strong reason why people go in for penny stock trading is that, one does not need a large amount of capital to start with. Penny stocks are very small in value. If you start with about $1000, and buy penny stocks worth 5 cents each, then you have about 20,000 shares to begin with.
Assume that you have $1000 to begin with. There are two companies - A (penny stock) and B (blue chip company).
Price of stock A - 10 cents each. Therefore, total number of shares bought is 10,000.
Price of stock B - $10. Total number of shares is 100.
Selling price of A - 12 cents each. Total amount is 12X10000 = $1200. Profit is $200.
Selling price of B - $11 each. Total amount is 11X100 = $1100. Profit is $100.
Compare the profit of a 2-cent increase in price with a one-dollar increase, and one would see that penny stocks tend to give higher returns in the short term.
Thus, trading penny stocks can be a very profitable venture, if you master the rules of the game very well. Superb advantage is one of the main reasons, why penny stocks are fast becoming so popular. Since penny stocks are priced so low, one can buy millions and billions of shares for a very small sum of money. If the price of the stock even doubles (which actually does happen), you can become a billionaire overnight. However, since the stocks are extremely volatile in nature, a smart investor would pull out his money within a very short time span.
Investment in penny stocks is more like a gamble, because people lose money nine out of the ten times they invest. However, the tenth time (if they are patient enough to persevere), then they get more than ten times the return for the losses. High-risk takers are the ones, who mostly invest in such stocks, because they do not have the fear of losing their money. If you are planning to go for penny stocks, do your homework first and then take the plunge.
© 2008 Penny Stocks.