What is a penny stock?

A Penny stock is a low priced, hence the Penny Stock name, security for small companies that have a market capitalization (market value) of under $500 million. They usually have very low trade volumes. Penny stocks trade on exchanges such as the OTCBB (Over The counter Bulletin Board an info service) and Pink Sheets (daily list of OTC stock offerings).

Penny stocks have a low trading volume and, therefore, are an investment that has considerable amount of risk. It is possible, because of low trading volume for an investor to be unable to sell their shares. Obtaining price quotations is another difficult creating another strong possibility of an investor losing their complete investment.

Penny stocks do appeal to some investors. It's likely that a new investor seeking a big investment windfall with a low entry price will come across penny stocks.

Their appeal is that changes in price is often measured in hundreds of percent points in a day or two. The stock value can double or triple their money over night.

Just as quickly, the price of penny stocks can go down. The penny stock value could become zero over night. Because of the high degree of risk new, inexperienced investors should not make penny stocks a significant part of their portfolio.

The requirements for listing on exchanges such as OCTBB and Pink Sheets is low.Another reason way many penny stock companies are considered unsafe investments.

Often penny stock companies lack sufficient financial history to judge accurately if they are good investments or not.

Many penny stock companies are new companies or companies that are close to bankruptcy.

Another risk is some traders artificially manipulating penny stock prices. They buy large amounts of a cheap stock and then persuad investors of the urgent need to buy it; at a higher price of course.

Because there are very few buyers the second investor will have to lower their asking price to attract bidders. They may never be able sell their stock.

Not all companies that trade for "pennies" are fraudulent. Many are just small, young companies struggling to grow their business. They are working hard to qualify for the larger stock exchanges.

Fighting past the unreputable companies to find a reputable one can help an investor turn a huge profit. However, this fight may not be worth it.

Nevertheless, many investors are convinced that a single good trade will double or triple their investment. Usually the investor is far better off investing in a company they have well researched which has a good value with growth potential.

I must be fair and admit that, with the right mind set, there is money to be made by trading penny stocks.

Money dedicated to penny stock trading must be money that the investor considers completely lost. Lost as in lost gambling.The newbie penny stock trader must get good advice.

To this last point, before posting this article I searched the web and I found one independent resource that is worth considering. If, in spite of my warning, you are interested in penny stocks , I searched the net and found one objective source of advice. "Marl" a computer that analysis thousands of penny stocks every minute.