The reason why so many people are turning to penny stocks is their wild fluctuation, and the possibility to make you rich overnight. Moreover due to their low price they are ideal for beginners, but experienced traders also like the thrill of their extremely risky nature. They are perfect for someone who wants to get a grasp of how stock market works, and how unpredictable it can be, but lacks funds to invest in other securities. On the other hand, you can reap nice profits with minimal investments, despite the low price per share.
What is Penny Stock?
Securities and Exchange Commission regard any stock that is rated below $5 per share a penny stock. In other words penny stocks are securities of small, unestablished companies whose background is difficult to research. That considering, penny stocks are usually traded on unregulated markets like Pink Sheets or Over-The-Counter Bulletin Board (OTCBB). They earned their name because they can be literally bought for small pennies and sold with an unprecedented turnover. Their notoriety comes from their unpredictability, but higher the risk, sweeter the reward.
Before you Buy…
You must know that penny stock trade is susceptible to all forms of market manipulations and trickeries, which will be explained later on. That is the reason why reputable markets like NASDAQ or NYSE usually don’t deal in them. Some brokers will stick to their price-per-share definition, while others will just regard penny stock anything that sells on the OTCBB or Pink Sheets. Their maximum price will vary from broker to broker, so you should always check with a broker as to how they define penny stocks and what the additional fees are.
The Attractiveness of Penny Stocks
Unlike with trading in shares of established companies like PepsiCo or Toyota, which normally accumulate from 10 to 20 percent in returns every year, and provide a steady income for vintage years, with penny stocks it is possible to anticipate a hundred of thousand-fold return on investment (ROI). There are a few no-nonsense blogs that give penny stock tips on how to get most out of them.
The Mechanism Behind
Sudden penny stock fluctuations are in most cases a result of media manipulation. When a company that issued penny stock becomes a subject of massive media coverage, for example because of a new project or service, the value of its stock is expected to skyrocket. This unexpected surge of attention causes the price of shares to erupt, making those who hold them rich overnight. The key is to ride the wave and sell, as no one can tell how much will they grow the next day – or how miserably will they fall. If you are lucky, you will sell them to those greedier than you, as it is with all stocks – the winner is the one who knows when to let go.
What is the Risk?
Their inherently risky nature can cause penny stocks to drop as suddenly as they have grown. This is why it is always advisable to research as much as you can before counting the money. Don’t lose that fact that stocks that trade on Pink Sheets and OTCBB are often a storefront for various scams. If you suddenly get spammed with a ton of friendly email tips on how make a fortune, or which company is hot, or receive any such kind of business suggestion, you should know that in that particular game you are not the player, but pawn. Only your, independent research and trade sense will get you anywhere.
The final word is that potential gains are almost as high as the risks, and the best advice is to enter the penny stock trade with an investment that is disposable. When you have grown some beard, you will know what to do next.