All About Penny Stocks

Over the decades, there has been an increasing number of individuals who are seriously considering investing in the stock market and other major money exchanges without having to spend too much cash on their investments. This can be accomplished through penny stocks.

These are common stocks of very low cost which are usually traded on over the counter or OTC markets or exchanges. Just how "low cost" are penny stocks? Usually, the price per share is below $5, with genuine penny stocks costing in the cents level. This could also mean having a market cap that is less than $50 million.

Because of their low cost, these are not being traded on major stock exchanges like the NYSE or AMEX. Most of the trading occurs in smaller money markets, although you will find some penny stocks of technology and biotechnology companies being traded on the NASDAQ.

Over the counter markets do not require the filing of financial statements with the SEC or regulatory listing requirements for it to be traded. In the case of the NASDAQ, listing requirements are also less strict and are cheaper, which is of benefit to the smaller companies offering these stocks. However, this lack of financial documentation makes it difficult for the investor to determine whether these stocks and the companies offering them are worth putting their money into. This makes penny stocks high-risk investments.

If you are planning to go into penny stock trading, you should be perfectly aware of how risky these stocks are because of their high volatility and limited liquidity. There is also the fact that the companies offering these stocks are newly established or are old firms with serious financial difficulties. In the case of the latter, the lack of financial documents makes it hard for the investor to keep tabs on significant factors in the company that may directly affect the value of the penny stocks. These factors include an insufficiency in minimum accounting standards, changes in share ownership, and notifications of impending bankruptcy, just to name a few. These factors and more makes it difficult to sell these because there are not enough buyers. Even if a large volume of penny stocks are traded, you have to expect dramatic price swings. It is not uncommon to see the values of these stocks drop to as low as 20 to 40 percent in one trading day and then go back to its original value before the market closes.

It is also important to mention that they are prone to manipulation. A common practice among manipulative traders is to drive the prices of these stocks through large volume buying and then selling them off before their values decline. Another form of manipulation is called "naked shorting". Here, the trader sells the shares of other people with the intention of buying these same stocks back when prices are lower.

Despite being risky investments, there are investors who see the potential of significant returns from these type of stocks, simply because the major investing financial institutions are not interested in them. In fact, many investors have made a killing in the market for picking lucrative penny stocks. Usually, a sudden increase in the price of penny stocks means that the major financial players have taken an interest in the company offering these stocks.