Want To Know What Penny Stocks To Buy? Look Inside….
July 3, 2009 by Sam Lockwood
Filed under Stock Trading
Penny stocks have been around for a long time – they’ve been part of American investment strategies since the 19th century. That’s where these stocks were named, since the modern penny stock actually costs somewhere between a dime and five dollars, not a penny. Let’s have a look at the risks you incur by investing in these stocks, as well as the ways they can help investors profit.
Penny stocks are share offerings made by companies that are either too new or too small to be listed in the major exchanges. These have a potential to grow a lot for a relatively small initial investment, but they can also be part of unpleasant pump and dump schemes. Like anything else in the over the counter (OTC) market, the buyer should beware.
Choosing penny stocks reasonably means that you need to have an independent appraisal of the company’s business model. Much like buying shares of any other kind of publicly traded company, it’s necessary to understand everything about the company. That means knowing what they do, what they make, what products are offered, how their business model works and who their major competitors are.
One of the most appealing things about penny stocks is that the majority of businesses offering them are quite simply put together. One typical type is that of a mining company, which will only be profitable when the price of the material it mines reaches a certain level. There are also some oil exploration stocks which use this kind of valuation.
Penny stocks are rated as a high risk vehicle by the Securities and Exchange Commission. Some of the risks involved include incomplete or indirect reporting of finances, fraud, and limited liquidity. People playing using a day trading strategy, sudden demand on penny stocks can create wide ranging volatility, which also makes it hard to short sell them.
Penny stocks have significantly less stringent financial reporting guidelines than listings on the national exchanges, and sometimes a stock will even de list for a few days. In the area of investing referred to as the Pink Sheets, penny stocks are known for having almost no requirements for regulation at all. They have no reporting guidelines or minimum accounting standards.
Because these stocks aren’t standardized and don’t have an generally accepted requirements for accounting, they can be extremely vulnerable to being manipulated or even just plain fraud. People posing as independent observers can encourage people to run up the price, then they sell and de list the stock. This is the classic pump and dump scam.
That doesn’t mean you should be scared away from these kinds of stocks completely. There are plenty of reasonable startup companies, and they need somewhere to start. If you’re able to pick a winner out of them, you’ll get a significant return.
If you’re able to spot a company with lots of promise, you could get an enormous payday. Even if you lose four out of five of your picks, the single winner you get will give you enough to forget about the other losses.
