Penny stocks are basically substandard stocks which are not traded onto the major stock exchanges like DOW Jones or NASDAQ. These are traded on pink sheets OTC (Over The Counter) Exchanges. The stocks trading below $5 per share are categorized as penny stocks and are more risky to trade than shares of big companies.
These penny stocks chosen correctly can turn out to be a gem in future for an investor. We have seen many established and big companies shares like Microsoft, INTEL and Wal-Mart were once a penny stock in their history, but ultimately these penny stocks are a big failure. Remember, only one or two penny stocks on an average out of 200 shares result into a blue chip.click here to read more information on how to invest in penny stocks.
Here are certain factors accountable for the failure of these penny stocks and that can also be the reason why the investors fear trading into these stocks. These can be;
- Not present on major stock exchanges: Penny stocks don’t exist on the major stock exchanges. The established exchanges have certain guidelines like market capitalization, trading volumes etc, which are required for any company to get their stock listed onto these exchanges. Many penny stocks don’t meet these guidelines and are traded on OTC.
- Lack of Information: Another reason that investors often lose their money while investing into penny stocks is failure to get any reliable historic or current information about the companies unlike in case of established companies where it is easy to get the same on websites, news channels and even free analysts’ reports. The lack of information about penny stock adds to the risk of investing in penny stocks.
- Manipulations: These penny stocks are often easily manipulated. The illiquid nature of penny stocks makes it simple for operators to manipulate the pricing and even a single entity can influence their stock price movement.
Stock market investment or trading is very popular among general public. Investment in stock market is the most risky investment compared to other sources of investment as choice of wrong stock can end you in a loss or even your whole investment to get eroded.
In stock market there are some stocks categorized as penny stocks, which trade below $5 and are most risky stocks compared to the high priced blue chip stocks because these penny stocks tend to be more volatile (either side) in their price movements. They are not only prone to stock market crashes, even can crash due to nonperformance of their business.read Penny Stock failure at http://www.barisera.net/penny-stocks-failure/
On an average, only a couple of stocks out of hundreds prove to be real investment gems; else other end up proving to be a nightmare of small investors. In spite being most risky investment, there are common fallacies pertaining to penny stocks which make investor interested to invest into these stocks and end up falling in a trap.
These are as below:
- Today’s blue chip was once a penny: The fallacy for most of investor falling into a trap believes that today’s blue chip like Microsoft and Wal-Mart etc were once a penny stock. The history of most common big companies for instance like Microsoft and Wal-Mart were once trading at very low price and this makes investor believe that stock trading at $1 or only in cents will also become future blue chip.
- Positive correlation to number of shares purchased to return: Most of the investors investing into penny stocks falls to this second fallacy and feel there is more room for appreciation and more opportunity to own more stocks. This convinces the investor that these micro-cap investors are rapid and super fire way to increase profits.
Penny stocks are small company’s stock trading at very low price per share. Such stocks are high risk and high volatile trades and are subject to manipulation by stock promoters and pump and dump schemes. These stocks present a high risk for investors, who are often lured by the hope of making large and quick profits.
Despite of high risk and other notable concerns, the penny stocks are always in limelight of investors who like to make huge profits. The business of these small, young and prosperous companies has a huge potential to grow their business and hence, the stock price tend to double of even increase to three times in short span of time. People looking for earning quick money mainly prefer penny stocks.
Taking an example, penny stock trading at $5 per share can get double to $10 per share or can increase to $15 or $20 per share, but it is very difficult for blue chip stock at $1000 pricing per share to achieve 2000 level.
Penny stock investments can be a boom for the investor, but on the other hand; it is coupled with huge risk for the investor and provide equal opportunity to lose the trading equity. So, these investments must be done with lot of cautious.
Here are some tips for investors to how to invest in these penny stocks and make huge profits:
- Trading volumes: Penny stocks are illiquid in nature. It is advisable to look for stock with consistent high trading volumes rather than average trading volumes. Analyzing average trading volumes can be misleading. For example, if stock ABC is traded with 1 million shares for 1st day and no share traded for rest of week, than its average daily volume will be 2 lac shares, which can be quite misleading for investors. In order to get in and out at an acceptable rate of return, consistent volume is must to be considered.
- Efficient management: While choosing the penny stock, investor needs to analyze the efficiently of management or promoters. Many startups incur loses initially, but have the need to analyze the reason for the same. The promoters must know how to make profits in business. Researching the right company for investing lower the risk of loss of capital and increases odds of much higher return.
- Plan Entry & Exit in stock: Penny stocks are very illiquid and that is the reason they can get highly volatile in their price movements. An investor must plan the entry and exit levels for the stock and must work accordingly as volatility make stock quickly move up and move down just as quickly.
- Authentic source of information: Penny stocks are manipulated by big investors and operators. Misleading positive information and statements are spread out through various means like fake press releases, SMS, emails, newsletters etc that persuade common investor to buy the stock and when price rises, and operator dump that stock, hence trapping the small investor. It is advisable that the source of information must be authentic because right source with good analysis makes perfect choice of stock and hence result in profit for investor.