Understanding Penny Stocks: Why They Are Different from Other Stocks

For the reasonable person, investing in penny stocks would first entail understanding penny stocks. Most people don’t just plug their money into something that could potentially cost them every cent that they have invested. On the other hand, there are people who blindly follow “advice” given to them by seeming experts without question. It is important to not only understand penny stocks, but also to know the most common types of scams that are used with them as well as the risks that are involved no matter how small your investment might seem.

A penny stock is one that is traded outside of the major stock market exchanges, regardless of the price of each share in some cases, but more commonly, the name is given to the stocks that are traded at prices below a whole dollar, hence the term “penny stock”. An important part of understanding penny stocks is to be aware that in some cases, they are looked at with such disdain that some stocks that trade at a higher share price are mockingly referred to as penny stocks as well. In some brokerage houses, especially those that are used to handling the larger accounts, any stock that trades for less than five dollars per share can be referred to as a penny stock.

There are a number of bad practices that might be tied to the penny stock market. These can include selling shares in companies that are bankrupt or about to go broke. To understand penny stocks, it means that you will have to have a general idea of the company that you are going to invest in, including the current economic status of that company and its potential future health.

If you find a penny stock for less than a dollar per share and you know that the company’s leadership is about to be sent to prison, then it is probably not worth the investment. Remember, five shares of zero is still worth zero.

Another issue to be aware of is the potential for price manipulation, a common problem with the penny stocks. You get an email that tells you about a particular penny stock and then you start seeing all of this information about this company - press releases, articles and more. The problem is that the press releases and the articles are fakes, planted there by the company that is trying to sell the stocks.

If you know how to read the symbols on the stock market’s ticker, that might be helpful as well. Bad penny stocks typically have a fifth letter in their ticker symbol, a letter which may mean that the company is bankrupt, has not sent in its financial reports or has other issues. Remember that knowing a little bit about the stock market in general is important to understanding penny stocks.