Any investor with interest in the stock market should know the answer this critical question: What are penny stocks? This will help him/her to understand where to invest, the rules that govern them and the risks involved.
Penny stocks, also referred to as cent stocks in other countries, are the shares of public companies which trade at low prices. In the United States, they are those shares that trade below $5 per share, while in the United Kingdom they are priced below 1 pound.
Many of these stocks in the stock market may lead to low market prices and ultimately low market capitalization. They are quite volatile and can be manipulated by the stoke promoters/brokers. They therefore pose a high risk to investors as they are often lured by the desire to make large profits in a short time. In the United States, they are normally traded over-the-counter. Different countries have different rules that define and even regulate the sale of these stocks.
What Are Penny Stocks: How Traders Use Them
Traders make money from penny stocks because they are cheaper and promise big and quick profits. For those investors who cannot afford highly priced shares, penny stocks are the best avenue for them to thrive.
With a small investment, one is able to reap maximum returns if the trade works out. For instance, a trader may purchase 10,000 shares that cost $0.30 for $3,000. In case the price of these shares reaches $1, the trader will make $ 7,000 which is more than double the amount he/she invested.
Penny stock promoters must always be a step ahead of securities regulators to avoid being charged with penny-stock manipulation. While investing in these stocks, one should be cautious and only focus on profitable stocks with solid earnings and a constant growth for at least 52 weeks.
Note that these stocks are sold more than they are actually bought. This is because they are highly publicized in newsletters and emails. The promoters are often paid by investors of a certain company to pitch their stocks for company exposure. It is therefore important to read the disclaimer at the bottom of the email or newsletter.
One allure of these stocks is that one can make 20%-30% profit within a short time. After making such returns, the person must sell them quickly before the prices fall.
What are Popular Penny Stocks?
Popular penny stocks right now include the following:
1. Smart Technologies Inc.
2. Chelsea Therapeutics International Limited
3. Plug Power
4. Nuvilex
What Are Penny Stock Concerns?
Many of these stocks do not trade much, especially those with extremely low prices.
However, penny stocks are often targeted by stock manipulators and promoters who buy
them in large quantities and artificially inflate their prices by issuing misleading positive
statements.
Penny Stock Regulation
What are penny stocks according to the stock market regulators? Regulators have certain
criteria they use before classifying stock as penny stocks. This is based on the minimum
shareholder equity, market capitalization and their price. Securities that are traded on the
national stock exchange are exempted from being classified as penny stocks regardless of
their prices. This can be attributed to the fact that they are not extremely vulnerable to
manipulation.
Most companies are working hard to become reputable in the stock market. However, for any investor, investing in penny stocks involves high risks and it may not be suitable for all investors. Extensive research is needed for one to understand what penny stocks are before engaging.