It is important to understand what a penny stock is before deciding to invest in one. There is no official definition for penny stocks, but there are three widely accepted guidelines to determining what one is.
First, the price of a stock determines whether or not it is a penny stock. Penny stocks are not sold for only a penny, but can be priced as low as a penny.
It is commonly accepted that any stock that sells under $5.00 is a penny stock. The SEC has set this guideline and most financial institutions agree.
Second the market that the stock is being traded on is an indicator of whether or not the stock can be considered a penny stock. Penny stocks are generally traded over the counter or through quotation services such as the OTC Bulletin Board or the Pink Sheets.
The National Association of Securities Dealers Automated Quotation (NASDAQ), the New York Stock Exchange (NYSE) and the American Stock Exchange (AMEX) do not sell penny stocks. Generally, if a stock is not being sold on these main stock markets it will be considered a penny stock.
Finally, the market capitalization can be another factor in determining whether or not a stock is a penny stock. Market cap is, in the most basic terms, the total trading value of the entire company.
Market cap is found by taking the value of each share of a stock and multiplying it by the total number of shares outstanding. Generally speaking organizations and individuals will treat the stock coming from a company with a market cal less than $10 million as penny stocks.
Considering that stock markets are so volatile, it is not unheard of that a stock falls in and climbs out of the penny stock classification throughout the day. The same stock that is considered a penny stock in the morning may not be considered one when the market closes at the end of the day.
Penny stocks are high risk investments. Just like any other high risk investment penny stocks hold the potential of being highly rewarding.
Penny stocks are much more volatile than conventional stocks. This volatility is the factor that gives them their high risk status.
Many uneducated investors are conned into buying these stocks. The price of these stocks is extremely low, so it is not hard to put buyers at ease when purchasing the stocks.
Trying to convince people to buy penny stocks is not a hard task. Spinning the truth, many companies will only emphasize the potential for growth that the company has.
Those that are being dishonest about penny stock fail to mention the fact that many lose all of their value in the long term. In the worst case scenarios businesses selling penny stocks may have a limited lack of liquidity, lack financial reporting and be fraudulent.
The SEC warns investors that penny stocks are high risk investments. New investors need to be fully aware of the risks involved and many times it is wise for new investors to wait until they become more familiar with the markets before they dabble in the market.
The markets that the stocks are traded on can also indicate a problem with the company. The requirements for a company to trade their stocks on the OTCBB or the Pink Sheets are substantially less than the requirements needed to trade on the NASDAQ or the NYSE.
The regulatory listing requirements on Pink Sheets are almost nonexistent compared to the larger markets. Pink Sheets do not require any minimum accounting standards, change in notification of ownership of shares and they do not require sellers to report other material changes affecting the financial viability of a company.
The precautions taken on the larger markets are in place to protect shareholders. Although there are more risks when trading on one of the smaller markets, it is possible to trade successfully on those markets.
The financial world holds many opportunities for people to get duped. There are some people that will claim to have done extensive amounts of financial research and offer advice online but in reality they are employees of the company they are promoting.
It is important to be extremely educated about the company you chose to invest in. If a company is selling penny stocks, it is even more important to do your research.
Penny stocks can be very lucrative when used correctly, and are a great way to make money if you invest your money with a company you are very confident in.
Author Resource:-
Terry Daniels has worked since the early 90s in the stock market as a broker selling stock. He has written hundreds of articles about penny stock picks and investing.
Contact Info:
Terry Daniels
TerryDaniels09@gmail.com
http://www.AffordableStock.com
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