Penny Stocks - Risky Investment Or High Payoff, You be The Judge

By: Tim Gorman
Submitted: 2007-01-17 16:16:37
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Penny stocks are stocks that normally hold a face value of less than $5. Many small companies offer these low-priced stocks to be traded on the Over-The-Counter-Bulletin-Board (OTCBB) and the Pink Sheets. This is mainly because neither the OTCBB nor the Pink Sheets require the same minimum requirements as the NASDAQ or the New York Stock Exchange (NYSE), set by the Securities and Exchange Commission. Businesses that are new or close to bankruptcy may issue penny stocks as a quick and easy way for these businesses to create quick capital and try to save the business from having to file bankruptcy in a court.

As you can imagine all of the aforementioned factors- low price, lack of stability and lack of standards- make penny stocks one of the most risky investments for anyone that is interested in playing or trading on the stock market. The fact is most penny stocks do actually end up in bankruptcy, but the lure of the great payoff if a company does succeed, is enough for many people to pursue the buying and selling of penny stocks. There are many other reasons why penny stocks are risky and it includes:

Low or poor liquidity: Since penny stocks are not traded very frequently, there may be difficulty finding a buyer. To interest someone in buying these stocks, the price may have to be priced substantially lowered.

Little or incomplete information about the company: Most of the companies that issue penny stocks do not have enough reportable history to learn a significant amount about them for those investors interested in doing research prior to investing their money. This is also due to the fact that the OTCBB and the Pink Sheets do not have to issue financial statements.

Potential for fraud: Penny stocks are often sold through spam email or off-shore brokers by con artists due in large part to the lack of regulation that penny stocks are not forced to abide by or suffer from.

Although some penny stocks are fraudulent and others are companies facing bankruptcies, this is not true in every case. Quite possibly some of the businesses will one day be listed on the NASDAQ or NYSE, but are currently struggling to meet the requirements. The opportunity to start with these companies from the very beginning can pay off in the end, given the growth potential. If you are able to get in on the ground floor with a company that does find success, you could ride all the way to the top.

It can be difficult determining which of these stocks has the potential for growth. The easiest way to become a victim of fraud is to do little, or even worse, no research. Obtaining this information can be time consuming and difficult, unless you have a very good knowledge of what it is that you are seeking. There are some companies that claim to have “inside information” about companies that issue penny stocks, but there is the possibility that this is a front in order to push a particular stock on an unsuspecting investor.

As an investor, you can either do research or take your chances. The fact that the stocks are very low in price means that if you do buy them, the chance that you lose a lot of money is small. If you are willing to take a loss and understand that the company could go under, they can be a fun and very interesting addition to your portfolio. It is important to remember that your odds are not very good. Most penny stocks will end up in a total loss.

It can be difficult to find a broker that will buy penny stocks. This is due in part to the difficulties in tracking them. There are some online brokers that specialize in penny stocks. Brokers are required by regulations to obtain written confirmation from the client regarding the transaction. In addition, the broker is required to give the client a document that outlines risks when it comes to speculating with penny stocks. Lastly, the broker must inform the buyer the amount of compensation that the firm will receive for the trade and the current market price of the stock. The client will receive monthly statements, which detail the market value of each penny stock that has been purchased.

As you can see penny stock s are an extremely risky investment but there are some instances where the rewards actually outweigh the risk associated with investing in an unknown company. The key is to actually find the right one.

Timothy Gorman is a successful Webmaster and publisher of Online Stock Trading Secrets. He provides more stock advice, information and ways to make money with penny stocks that you can research in your pajamas on his website.

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