Penny stocks give investors with a smaller cash flow the
opportunity to experience large gains. Of course penny stocks are not just for
the investor with empty pockets but usually those with tons of money dont
concern themselves with micro-cap/penny stocks. This is for a couple reasons.
One reason is investing too much money can move the market too much. The other
is than usually dont mind slow gains.
You can rarely have a discussion about penny stocks without mentioning the
risks associate with such an investment. One of the things to keep in mind when
investing in penny stocks is that dont trade frequently like larger cap stocks
typically do. How can this be a problem? Well, if you decide you want to do a
quick buy and sell on a stock it may not be as easy as you would like. The
stock goes up and then you decide to try to sell but not enough people are
buying for you to get out of the stock and take your profits. Its not
impossible to get out but it can be a factor if you are day trading.
So why do penny stocks have a bad reputation? One major reason is that most
spam emails about buying stocks are usually about penny stocks. This of course
is coincidence considering the sensitivity of penny stock to any kind of
activity whatsoever. Usually these types of email campaigns are pushing stocks
worth less than a dollar in hopes of causing relatively big movement in the
market.
Something to keep in mind is that penny stocks are not traded in the big stock
exchanges like NYSE or NASDAQ. They are instead traded in whats called the Over
the Counter Market or OTC. This is important to remember because it basically
means they have not reached the big leagues yet as an established and well
known company. They are certainly far from being in the S&P 500 which is
the other end of the stock market spectrum.
As an investor in penny stocks you must know they these stocks do not behave in
any typical manner. You must be prepared to lose you whole investment though
this worst case scenario does not happen often. If nothing else just be
prepared to lose a significant chunk of money on a sell off. Penny stocks by
nature are unpredictable and cannot be expected to perform consistently. Given
enough time and experience you will of course learn the tell tell signs of a
winner or loser.
