According to Investopedia.com, Penny stock is:
“A stock that trades at a relatively low price and market capitalization, usually outside of the major market exchanges. These types of stocks are generally considered to be highly speculative and high risk because of their lack of liquidity, large bid-ask spreads, small capitalization and limited following and disclosure. They will often trade over the counter through the OTCBB and pink sheets.”
In general, any stock that trades under $5.00 falls under the category of penny stocks. Penny stocks are interesting to deal with and offer profitable opportunities. Many investors wish to invest in today’s biggest stocks when they could have purchased them for pennies. It has become extremely difficult to invest in leading companies such as Google ($1,000 +) because of the high share price. As a result, small investors are left with limited choices for investing their money.
Penny stocks offer a ray of hope to make a considerable profit out of their investment. Most of the new companies offer their shares at less than a dollar amount and these stocks are traded as penny stocks. Small investors can get started with these stocks with a considerably smaller amount. These stocks are traded over-the-counter and are comparatively lower risk investments. SEC and similar US authorities monitor these transactions.
Why invest in penny stocks?
- Penny stocks do not cost much: You can buy thousands of penny stock shares against one share of a leading company. Let us consider a technology company with an initial opening price of 10 cents. You can purchase 5,000 stocks for $500 and if the stock price rises up to $1.00, your investment would turn profitable by $5,000.
- Quick Returns: With the help of proper research, you can trace out stocks that are about to burst high. Some recent examples have shown the prices to get double within 24 hours as compared to the stocks in NYSE.
- Penny stocks are easy to buy: The trading procedure is somewhat similar to the regular stock market and you can buy/sell penny stocks online. You can use the services of a traditional broker or start your online account for the same.
How to prepare a penny stock investment strategy?
The idea is to look for new companies with a potential of growth in the upcoming months. You should consider some important factors before investing in any particular industry. Some of these factors are:
- Select a company with strong company management: Penny stocks are traded for such a price because of the financial hardships of the company or because of the young age of the firm. It is best to choose a young company with a proven professional record in the industry.
- Check product and service demand: It is best to choose companies whose products/services are in demand. A company with popular products is likely to make more profits in future.
- Get to know the company: Share prices are always affected by important announcements and company news. If you are planning to make a quick profit, it is important to be aware of the latest action within the company.
Monitor the sector: Penny stocks are a part of a particular industry. It is important to monitor the trends of the industry and identify sectors with potential growth.