So what is a Penny Stock Anyway?

There is a lot of hype on the internet about these types of stock investments. Nevertheless, many people do not know exactly what is meant by it. The definition states that it is "a stock that sells for a smaller amount than $5 for each share and  is therefore given this name by the SEC. Nonetheless, most people who invest conceive of these stocks as those that can be bought for less than $1 and are sold "on the pink sheets". So saying that is the value that we'll use.

Because the corporations who hand out penny stocks are commonly just starting out, with a small amount or no fiscal history, the shares are perceived to have a greater degree of risk. The penny stock market is unusually volatile and share prices can move by 100% or more in a just one trading session. So as you can tell it is a very fast moving market.

Despite what many believe, the terms "penny stocks" and "junk" are not synonymous. Many of these stocks are actually quite desirable although it can be hard to learn the winners amongst the losers. You do have to do your research.

The principle difficulty when trading these stocks is that there is a lack of concrete information about the corporations. Often times, the knowledge that you do learn is propagated by the company itself and can not be considered trustworthy or impartial.

A number of the main stock trading sites host message boards that target  penny stock trading, but this information is again not always trustworthy. Some corporations in fact reimburse people to make affirmative postings.

What are the Risks and Rewards?

Many financial advisors warn against putting your money in penny stocks because of the possible financial risks involved. Several advisors decline to use the term "investing" and actually believe that it is more like gambling.

One risk that must be noted is that since there is often a very tiny market for a precise share, you may not be able to get rid of your penny stock exactly when you want to. This is particularly true when the prices are declining. You could, literally, lose your entire investment in minutes.

Because of the tiny price of each share, it's easy for their price per share to be manipulated by people who specialize in a practice called "pump & dump". That is when propaganda and deceit are released on the message boards and  groups about "some good news" that is hush hush and about to happen to a specific stock. Every person, who gets conned, rushes to purchase the share which results in the price skyrocketing. At the same time the scammers are selling their shares at these overvalued prices and, when all of the hype is over, the investors have lost a ton of money while these scammers rake in the cash.

So, is investing in penny stocks a good idea? That depends on you and your level of acceptable risk. If you have a small amount that you are willing to risk, and you don't mind putting it into the penny stock market , then all you need is the time and patience to pick out the penny stocks that may actually have some value. Theoretically, you can profit greatly because you are able to buy hundreds or even thousands of shares for very little money. With that many shares you do not need the stock to go up that much to be in profit. Then again you could lose your initial investment entirely if the stock tanks.