Investing in Penny Stocks


 

Most people realize that investing in the stock market can make them money, but what a lot of people don’t know is that penny stocks can be a great way to get into the markets without having a lot of cash to start with.

So if you’re asking yourself, “How can I make money?” then one way you might consider is investing in “stocks for a penny”.

 

What Are Penny Stocks?



First it’s important to start with an understanding of what these types of stocks are. As a general rule, the Securities and Exchange Commission considers these high risk stocks to be those that trade for less than $5 per share. However, SEC regulators say stocks must also meet certain other criteria to qualify for the category.

If the stock is traded on a national stock exchange, then it won’t be categorized as a penny type stock, no matter what its trade price is. For example, Citigroup was trading at less than $1 per share on the New York Stock Exchange during the recession of 2008 and 2009, but it was not considered a penny stock. However the NASDAQ is not a national stock exchange, so low-priced stocks that trade there are considered to be penny type stocks.

Moreover, most of these stocks are quoted “over-the-counter,” or on pink sheets or the OTC bulletin board. Third, they are often private company securities that don’t have an active trading market.


The Risks of “Stocks for a Penny”



Potential investors should note that these stocks carry a great amount of risk as an investment. In fact, the risk is so great that regulators with the SEC require you to sign an agreement before the transaction will occur. That agreement will list the risks of investing in these highly speculative stocks and tell you what the market quote is.

One of the main risks involved in such stocks is not getting your money back. These stocks are typically very hard to sell because they are not traded very often. Also it can be hard to find price quotes for many of them.

Another major risk involved is the possibility of artificial price manipulation, also known as “pump and dump.” An investor may spread around false information about a company to inflate its stock price and then sell all his shares at the higher price before it is found out that the information was false.

This is why it is critical that you do your research on each and every stock before you invest your money.  You have to do your due diligence just like you would with any other type of investment, or if you were starting a business.  Also try to invest in three or more of these stocks so that you aren’t putting all of your money into just a single stock. Diversifying gives you a greater chance for success.  Continue Reading...




 

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