Pros and Cons of Investing in Penny Stocks


The major stock exchanges like the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX), and the National Association of Securities Dealers Automated Quotations (NASDAQ) usually come in when someone thinks of trading stocks. A penny stock is low-priced security for small companies with a market capitalization of under $500 million and usually traded in very low volumes. Penny stocks are also traded on other “over the counter” exchanges like OTCBB and Pink Sheets.

Penny stocks come with a sizeable amount of risk due to the low trading volumes of this type of investment. According to the Securities and Exchange Commission, this could also be a risk. Possibilities are that investors in penny stocks may not be able to find a buyer for their shares. It is also possible that investors can lose their entire investments as it is difficult to find accurate price quotations.

Make A Good Investment

Penny stocks do carry a certain appeal for many different kinds of investors. If a new investor is looking for a potentially lucrative investment with a fairly low entry price chances are he will run across the penny stock. With the low price changes are often measurable in hundreds of percent in a given day or two. This way the stock value of an investor can literally become worth double or even triple the original investment amount.

But as they can rise penny stocks can also drop in value just as quickly. New and inexperienced investors should stay away from making penny stocks a major part of their investment portfolio. Many companies should not be considered safe investments due to the low listing requirements on exchanges like OCTBB and Pink Sheets. Several companies listed on these alternative stock exchanges lack financial history to determine if they would make a good investment or not. Companies that are considered penny stocks are sometimes considered to be new companies or dangerously close to bankruptcy.

Some traders have taken on artificial manipulation of the stock prices by buying up large amounts of a stock and then convincing individual investors of the need to buy. As most of these stocks are not in such great demand an investor might have to lower his asking prive in order to entice a bidder. And that could mean a potential loss.

But not every company “trading for pennies” should be considered as fraudulent. They could just be small companies trying to grow their business while working hard to end up on the larger market exchanges. It may not be worth it to wade through the fraudulent companies to find the ones truly reputable and help an investor to turn a large profit. The chance that just one good trade can triple an investment convinces several investors with low investment income. But in the end, an investor would be better off choosing an investment from a company they are convinced that this company’s value will grow in the future.