Penny Stock Investing

Low prices attract many people to penny stock investing. With an average price around $1.00, these micro cap stocks are usually limited to $5.00 or $3.00 per share. For individuals who don't have thousands of dollars available to invest, this type of investing can be a great opportunity to get involved. The opportunity to make a lot of money is limitless. Many large companies did not begin on the major exchanges like the New York Stock Exchange (NYSE) or the NASDAQ. They began on secondary exchanges or pink sheets as penny stocks. Companies begin on smaller exchanges often because the total value of their company is relatively small, between fifty and 300 million dollars. The Over-the-Counter Bulletin Board (OTC-BB) is one of the most popular secondary exchanges. People who participate in penny stock investing are often in search of the next big product and hope to strike gold. Sometimes, they find it, but making money from secondary markets is not that easy.

In short, penny stock investing is much riskier than putting money in traditional primary markets. Larger companies who sell on the NYSE or NASDAQ are required by the U.S. Securities and Exchange Commission (SEC) to release audited financial records for the public to review. Businesses who use secondary exchanges are not required to publicly file reports. When companies listed on the major exchanges can no longer provide the minimum standard requirements, they often move to the OTC-BB. Information is minimal or often non-existent. What little information is available frequently comes from sources that lack credibility. Most stocks on these exchanges are with newly formed companies or those who are close to bankruptcy. Company history is hard to find. Those that have some history often have a poor track record. Another risk factor is low level of liquidity on the smaller markets. Stocks are much harder to resell and sometimes cannot be sold at all. Investors may have to lower the price considerably before finding a buyer, losing money in the process. There are some companies on the secondary market that are trying to build a solid business reputation and gain access to the primary exchanges, but identifying them can be difficult. The SEC does require brokers inform investors of the risks of penny stock investing in writing and get their written approval before making any transactions. Brokers must also be up front about any compensation the firm will receive for the trade and provide monthly statements to the investor.

Penny stock investing is also an easy target for fraud. Some companies pay third parties to recommend the stock in newsletters, on television or radio, or by sending spam email to potential investors. Traders use several techniques to manipulate stock prices on secondary markets to make them more attractive to buyers. In one common technique, traders will purchase stock, then create positive rumors to drive the price up before they sell. In a similar scheme, others will circulate false rumors that drive the price down so they can purchase cheaply and then resell at its true value. The Bible promises that those who deal in fraud will be found out. "A false witness shall not be unpunished, and he that speaketh lies shall not escape." (Proverbs 19:5) Investors must also watch out for penny stock investing pyramid schemes that sell company shells with no product, history or experience to large numbers of people who in turn, often unknowingly, resell to many others at an inflated price. The more the stock is resold, the higher the premium, until it is so over price, the system cannot support the higher sales and it collapses. People who invested last lose the most money. Only the top few really earn a profit. The rest are left with nothing but worthless stock. Unfortunately, there are no federal or state agencies that oversee or regular these multi-level marketing schemes. Not all penny stocks are fraudulent. Companies with low prices are very legitimate. But fraud does occur when they sell overpriced stocks or manipulate the price in any way.

Still, penny stocks do appeal to certain investors. The value of any stock is determined by how much someone is willing to pay for it. The key to penny stock investing is quality, not quantity. Look for potential in the company and in the product. People who want to invest in secondary markets should investigate the stocks thoroughly before buying. Don't allow price to be the only determining factor. Check out the company's financial records, if any are made public. Research the history, revenue, profitability and employees of stocks under consideration. The Walker's Manual of Penny Stocks, available in the reference section of most libraries lists companies that may be good risks. Read magazines and newspapers about penny stocks and the risks involved. Seek the advice of a financial adviser. Set a limit on how much to invest. Most advisers recommend limiting the amount to 10% of savings. Never invest all savings assets into something this risky. But don't be afraid to take some risk for greater returns.

Many investors advise to simply avoid penny stock investing altogether because of the high risk involved. Prices fluctuate greatly. They go up and down very fast. Investors must learn how to invest and how to ride the ebbs and flows of the market. But good investors do takes calculated risks. But high risk is not for everyone. Individuals who are not comfortable with the possibility of losing all their money should not invest in penny stocks, but look for something less risky.