Why Penny Stocks ?

Penny stocks are an exciting and profitable investment vehicle for many reasons. With low share prices and high volatility, penny stocks can reap huge rewards. If one can get on the right track, they can easily turn a few thousand dollars into tens of thousands quickly. An investor can expect great moves in share price in a relatively short time period. Additionally, they are one of the best ways to get into America’s brightest new companies before they hit the big time.

A “penny stock”, also referred to as a “micro cap stock” or a “nano cap stock”, is a security which is issued by companies with a small market capitalization. Although one can find many different definitions of a penny stock, generally these stocks represent companies with a market capitalization in the $10MM to $100MM range. Somewhat misleading is the United States Securities and Exchange Commission’s (SEC) definition of a penny stock as stock which trades below five dollars ($5.00) per share. As many large cap companies including Sprint (NYSE: S) and Citigroup (NYSE:C) among others, trade below this price point (especially in recent recessionary times), an analysis of market capitalization provides a more accurate measure of a true penny stock. Another clear definition of a penny stock among industry insiders and regulatory bodies is a stock which trades on the NASDAQ OTC exchange or via the Pink Sheets quotation system.

Traditionally, penny stocks were considered a speculative investment, however today they are increasing in popularity, mainly due to increased regulation and the technological revolution making analysis of trends and data more accurate. Investors of all skill levels are accessing the Pink Sheets and OTCBB marketplace and are making these investments a larger portion of their portfolio. There are some disadvantages in the penny stock world, but none different then those which exist in the mid and large cap markets.

A couple of quick pieces of advice to avoid the downside of micro cap stocks. Primarily, be aware of the hype created by unscrupulous internet and print media. The age old pump and dump strategy is alive and well in the Penny Stock markets, so due diligence is a must. A lack of detailed regulation is another primary reason to be well educated before buying these stocks.

Successfully trading penny stocks is much like investing and trading any other security. A solid knowledge of the company and industry to which you are investing is paramount to profitability. However, the penny stock markets contain much more volatility and these stocks act and react to market conditions with a much greater fervor. This can provide the investor with some additional risk, but with proper knowledge, also provides a much greater opportunity for profit.

As with all stock trading, every decision will not be correct, even the most experienced traders who have watched the markets for years and have tracked and analyzed the historical data on a particular security knows that there is risk in trading any stock. However, those same traders have also realized large gains in short periods from investing in penny stocks.

Now that we have reviewed a general understanding of penny stocks and the risk and reward which comes from investment in this type of security, let’s more clearly define what makes investment in penny stocks a unique opportunity.