Simply put, stocks with a market value of less than or equal to $5 are called penny stocks, although the masses generally relate to this term for values of less than $1. They are incredibly cheap and first-time investors typically think of buying them owing to the incredible upswing opportunities they offer. However, they have their own set of risks too. The penny stock market’s high volatility creates risk of extremely high losses.
Penny Stock Market
According to the Securities and Exchange Commission, a penny stock is a security with the market value below $5. Often they are small companies. However, there are many well known companies which are or have traded as penny stocks, such as Ford Motor company (F) and General Motors (GM) around 2008. Additionally, Fannie Mae (FNMA) and Freddie Mac (FMCC) currently trade as penny stocks, currently valued around $1.36 and $1.28 respectively.
Small stock exchanges aren’t monitored well, therefore, they are prone to scams.
Investing in Penny Stocks
Investing in penny stocks is extremely risky. A top reason for risk is their low liquidity. Sometimes when you want to sell your penny stocks as their price increases (or decreases), you will not be able to sell them because of low market demand.
The share price of low float and low volume stocks are easy to manipulate. You see the evidence of a manipulation when the share price rises drastically in short time period without basis. Such uneven changes sometimes go unnoticed by the regulatory institutions because there are thousands of companies to track. As a result, before investing in penny stocks, it is advisable to research the company from credible sources.
The investor should assess the performance of penny stocks before buying them. It’s hardly a surprise that buying penny stocks yields amazing returns. For example, if you bought 10,000 shares of a small company worth $0.50 per share even a jump to the price of $1 will double its worth.
You need a brokerage account for buying and selling penny stocks. You might have to call in the orders, as many internet brokerages do not allow the online trading of penny stocks. To be on the safe side, you should master the fundamental and technical analysis. Technical analysis involves reading charts and trends as well as predicting the performance of shares.
Penny stocks provide an incredible opportunity to get great returns. A knack for details, vigilance, market knowledge and the ability to identify the right opportunities establishes a foundation for success!