Ever wonder what penny stocks are and whether you should consider investing in them? Well before you even think of buying penny stocks there are a number of factors that need to be considered. Firstly though, let’s define what a penny stock is. Ask most penny stock brokers and they’ll tell you that penny stocks are essentially stocks that are priced below $5.00 per share or have a very small market capitalization. Popular penny stocks will often trade in high volumes due to their low stock price. It is also possible for them to have low trading volumes however which could cause a problem if you ever want to take out any profits you may have realized from an increase of the stock price. If you own 10,000 shares but the daily volume is only 4,000 shares, you will not be able to get your money out of the stock very easily.
There are many people who say that a lot of money can be made in the trading of penny stocks. They offer to sell advice on how to make a large profit on this particular type of trading. Some of this advice may be legitimate however beware that often they are scams. There are predators out there who will try to get you to buy into certain penny stocks and then after the price has been driven up, they will dump out of the stock leaving many investors holding the bag. This is known as the classic “pump and dump” tactic.
If you do choose to buy penny stocks, you need to proceed with great caution. Research the company thoroughly and make sure the company you wish to invest in has an actual product and legitimate sales revenue. Take a good look at the profits generated by the company and who their management team is. Research how long the company has been in business. After you have done your homework, you may find that the company is a legitimate start up company that has the classification of penny stock due to them just getting off the ground. If it appears they have potential for growth, this may be a good company to invest in. I once worked for a company like that. Their stock price was well below $5.00 per share for quite a while, but they developed a winning product and the stock price exploded to $30.00 per share. This could happen to a stock you are looking at. Just do your due diligence and never put all your money into a single stock. Diversify your hold holdings amongst at a least a few dozen stocks, including more stable blue chip stocks, a gold ETF even (check up on gold etf news before you do, though), and bonds.