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What are Penny stocks?

Penny Stocks are low-priced stocks of small companies. The stocks trade for less than $5 per share. They are not traded on the major exchanges such as the New York Stock Exchange or NASDAQ. Rather they are found on over the counter listing services (OTC). Penny Stocks are among the riskiest types of stock investments available; these companies have fewer shareholders than large companies, and because of that, any significant change in demand for the shares can send the stock price soaring or crashing.

This is also the reason investors are drawn to them. There’s always the possibility of the share price doubling or tripling in a short period of time, even in just a few days. Penny stocks can offer a lot of excitement for a small dollar investment. Investors truly enjoy the process of trying to uncover a penny stock that is about to explode in trading volume and price appreciation. It’s almost the same thrill as finding hidden treasure. For the small investor used to only buying a few shares at a time on the large exchanges, there’s also the psychological aspect of being able to go in and buy 5,000 shares of something (and it only costs $250).

This excitement must always be tempered by a realization of the risks involved in penny stock investing. Penny stocks do not offer the liquidity of stocks in larger well-known, actively traded companies—the brand name corporations we are all familiar with such as IBM or Cisco Systems. If demand for the penny stock’s shares suddenly dries up, you might put in a sell order and find there are no buyers that day. It can also be difficult to do your research on these stocks before you buy. Financial information available about them can be scanty and even unreliable. The accounting and reporting standards used by some of these companies are often not be as rigorous as those used by larger companies listed on the major exchanges.

Investors might take notice of a penny stock that was trading for 10 cents a share, and then spikes up to 30 cents a share in a week, and compare that to a stock in a large company selling for $50 a share having to zoom up to $150 a share to achieve the same percentage appreciation—which is highly unlikely in a short period of time. The difference is, it is extremely unlikely the $50 stock could drop to a value of zero. With a penny stock, that is always a possibility. Before deciding to invest in penny stocks, you have to assess your individual attitude toward risk.

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