What To Know When Buying Penny Stocks

What To Know When Buying Penny Stocks

Posted on 11. Dec, 2010 by in Stocks

Buying penny stocks can give some people the impression that they are playing a carnival game for which the best prize is a stuffed animal.  However, investing in this type of stock is no game at all.  The number of shares traded on an average product can reach into the millions of dollars on any day of the week.

A Little Background Information

The term, as it is used in the United States, means a stock that sells for under five dollars a share.  These stocks are not traded on the major exchanges that are well-known to even the novice investor, such as the NYSE, AMEX, and NASDAQ.

When trades are made outside of the popular exchanges, the stocks are said to pose a higher risk because there is less control over the trading and management of the product.  It has also been said by the richest financial wizards that high risk can equal a high reward.

In Great Britain, these stocks are known as penny shares.  Although the specifications are slightly different, the idea is the same.  They are shares that are traded on smaller companies that are considered to have a lower value.  The Financial Services Authority in Britain places a standard regulatory risk warning on this type of stock.

Where to Find Them

Penny shares cannot be purchased through the popular exchanges.  They are instead sold on what is known as Over the Counter or OTC.  An OTC stock can be found in two places; the OTC Bulletin Board, or on Pink Sheets.  Most companies that are quoted on the bulletin board are also quoted on the Pink Sheets.

The OTC Bulletin Board is a web-based site that provides quotes in actual-time, as well as all of the typical stock activity information you would need such as volume and current price.  Although there is less regulatory oversight on such stocks, the companies are still required to register with the SEC and conform to specific requirements.

Pink Sheets got their name from the pink paper they were printed on.  But that is a thing of the past.  Now, Pink Sheets is an online service but it still honors the original name.  It is worth noting that Pink Sheets is not registered with any regulatory body such as the SEC or FINRA.  Although this may be an issue for some people, others believe that recent history has shown that such commissions can not protect investors from every eventuality.

Smart Investing

These stocks are a hot commodity for those just starting out in life.  At this time of life, people often have some disposable income and fewer financial responsibilities, so they can take a chance on riskier investments.  Plus, the low price of the stocks feeds the belief that the price can only go up.  History has shown that some investors have won the penny bet, although they are not often as simple to sell as they were to buy.  One sure thing to remember with all investments is that there is no such thing as a sure thing.

The appeal of this stock is that profits can grow fast in the short-term.  You can buy penny stocks through a broker or you can invest for yourself by joining an online exchange.  This is a boon for many eager investors because the game is entirely in their hands.

Anyone interested in buying penny stocks knows that investing means taking a risk.  This is a good investment option for those who are still young enough to assume some risk as well as for more seasoned investors who can afford to try their luck.

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