Pros and cons of investing in penny stocks

Typically, when you think of trading stocks, the major stock exchanges may come to mind, such as the New York Stock Exchange (NYSE), the National Association of Stock Dealers Automated Quotes (NASDAQ), and the Stock Exchange. American Securities (AMEX). A penny stock is a low-priced security for a very small company with a market capitalization of less than $500 million and typically trades in very low volumes. Penny stocks are also traded on other “over the counter” exchanges like OTCBB and Pink Sheets.

Due to low trading volumes, penny stocks are an investment option that carries a considerable amount of risk. According to the Securities and Exchange Commission, potential investors in penny stocks should be aware of the fact that due to the low trading volume of these shares, an investor may not find a buyer for their shares. Finding accurate price quotes is also difficult, so there is a high chance that an investor will lose their entire investment.

Penny stocks have a certain appeal to many different types of investors. However, a new investor looking for potentially lucrative investments with a fairly low entry price is likely to stumble upon penny stocks. The appeal lies in the fact that, at prices this low, any change can often be measured by hundreds of percent in a given day or two. The value of an investor’s shares can literally become double or even triple the amount of the original investment.

Conversely, the price of a penny stock can drop in value just as quickly. New and inexperienced investors would do well to avoid making penny stocks a major part of their investment portfolio. Also, due to the low listing requirements on exchanges such as OCTBB and Pink Sheets, many companies should not be considered safe investments. Many of the companies listed on alternative exchanges lack sufficient financial history to be able to accurately determine whether or not they would make a good investment. In some cases, the companies that are considered penny stocks are start-ups or, in some cases, dangerously close to bankruptcy.

Unfortunately, some traders have even artificially manipulated stock prices by buying large amounts of shares and then convincing individual investors of the need to buy. Since most of these stocks are not in as high demand, an investor will have to lower their asking price to attract a bidder, often at a loss.

Not all companies that trade for “pennies” should be considered fraudulent. Some are just small companies trying to grow their business and are working very hard to end up on the larger market exchanges. It may not be worth sifting through fraudulent companies to find genuinely reputable companies capable of helping an investor make huge profits. Investors with low investment income may be convinced that only a good trade can triple their investment, but in the end an investor is better off choosing an investment from a company that they have done their research and are convinced that the value of this company will grow in the future.