Stocks are generally categorized according to their market capitalization and price value by the market players. Accordingly, we hear terms like large cap stocks, medium cap stocks and small cap stocks. Shares with very small market cap (up to $100 million) and a maximum price value of up to $ 3 are called penny stocks in the market jargon. These are usually cited as the opposite of blue chip shares, which often carry a premium tag. Penny stocks are usually traded over the counter (OTC) by the brokers because they are unable to list on exchanges due to their stringent norms.

For one thing, big exchanges like the New York Stock Exchange (NYSE) and NASDAQ prefer top-of-the – line companies for listing. More so because they too are keen to feed on reputation of the companies they trade in just as the latter want to cash in on huge turnover volumes of these exchanges. Second, they also strictly enforce compliance of their norms by the listed companies, meaning that those who fail to do so are automatically de-listed. Such exchanges tend to evaluate performance record and caliber of top management of the company applying to list with them.

In contrast, penny stocks are mainly unlisted and traded outside exchanges. In other words, they are nondescript stocks with listless trading. Penny stocks mostly change hands between brokers, without getting much notice from common investors. This is because this category of stocks is supposed to be risky due to lack of key information on the concerned companies, their promoters and management. Perhaps this is the reason why these stocks are so often targeted by investment scammers.

Nevertheless, penny stocks can also turn in unexpectedly big returns if they rise on the fundamentals of the concerned company rather than any market manipulation. This is because most of the penny stocks are generally quite undervalued due to lack of market support. So, anyone who can lay his hands on the right penny stocks might reap unexpected gains some day.

 

 

Penny stocks are definitely risks that are better suited for the investor that likes to go skydiving, skinny-dipping, and bungee jumping. Of course even a few more conservative investors will find some attraction in the low risk promise of hefty payouts that the right penny stock can offer. In fact, many investors dream of being the one to find that perfect penny stock with absolute potential that will someday become the next LDDS turned WorldCom before the fall. The truth is that little businesses become big businesses everyday. Unfortunately, those that make it to the big leagues are quite few in number when compared to those who do not.

Penny stocks are a great way for small companies to finance growth spurts, smooth over rough spots and manage to become even better. This also gives companies a chance to restructure and by allowing their stocks to be traded as penny stocks they are generating revenue that can be reinvested into the company to great effect. Many times, this is a successful venture for the company but there are many times it isn’t. This is part of the risk that is taken when investing in penny stocks. When the companies manage to pull themselves together, grow at an exceptional rate, and become the company you hope they can become the payouts are amazing. But do not expect immediate results from your penny stock investment.

You should also be aware that many companies use penny stocks in order to run scams on unsuspecting investors. It is nearly impossible to get all the particulars about penny stock companies when investing in penny stocks because unlike those companies that trade with the big boys (NYCE, NASDAQ, etc.) these companies are not required to open their books to potential investors and do not face nearly the same amount of scrutiny that larger corporations face when opening their doors to investors.

But the question of whether or not penny stock trading is for your is going to depend almost entirely on your personal sense of adventure and your willingness to take risks with your money. There are many out there who firmly believe that in order to gain much, you must also be willing to risk much. This is a way of life for many that holds true for them in love, life, and in money. These people are much more capricious with their money and are willing to take the risk without reservation or fear of a negative outcome. These are the people who do wonderfully, win or loose when investing in penny stocks.

On the other end of the spectrum there are those who jealously guard their nest eggs and bank their retirement security upon the funds going in that basket. These are people that are quite likely to find themselves panicking their way through a penny stock investment for many reasons. You can’t really research the companies (a travesty to people who prefer careful planning) and you can’t gain quick and easy access to your funds once invested. This removes some sense of control over you financial health and isn’t a comfortable feeling for investors who like to feel in control. I can definitely relate to those who are in no condition, really, to invest in penny stocks. It’s a frightening investment practice when houses, retirements, braces, and college educations are on the line.

If you are the type to invest in penny stocks without carrying the heavy baggage of worry, stress, and nervous sweats along with you then you may find yourself in the position to change your wealth status. Even if you go against your comfort level and make the investment there is much to gain. Unfortunately the risks of this sort of investment are great as well and should not be overlooked or underestimated. So it still boils down to you and the person you are deep down inside. Are penny stocks right for you? Only you can answer that.

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