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PENNY STOCK INVESTING | WHAT IS PENNY STOCK INVESTMENT?

Updated on January 9, 2011

Penny stock investing has made a lot of people that would have been classified as middle-class individuals are classed as mega/ultra rich people. This fact no doubt has drawn a lot of attention to penny stock investment.

The rush for penny stock investment has made a lot of people make mistakes and fall victim of investment scam. The funniest thing about penny stock investing that is now making waves is that most people that claim to invest in penny stock don’t actually know what penny is, characteristics of penny stock, benefits of penny stock, and disadvantages of penny stock. This article will take time to explain all the points highlighted above.

WHAT IS PENNY STOCK?

Penny stocks are shares that are comparatively cheap. Note that the word comparative is relative. However, there are criterions that have been devised in many parts of the world. Depending on the value of your country’s currency, any amount can be penny or blue-chip stock. Blue-chip stock is the direct opposite of penny stock. For the purpose of this article, I would use a hypothetical country whose currency unit is called POWER (P). Any stock sold for less than P20 could be said to be a penny stock.

Again, penny stock could be said to be stocks that have not really gained the confidence of stock market investors.

CHARACTERISTICS OF PENNY STOCK

CHEAP

The most predominant feature / characteristics of a penny stock are that it is cheap. Like I have stated before, the term cheap is relative and needs to be compared to some basis.

NEW IN STOCK MARKET

Another trademark of penny stocks is that they are usually new entrants in the market. You cannot expect an old company to still be classed as a penny stock, though this happens but is very rare. Old (blue-chip) companies embark on share split from time to time in order to make their shares liquid but, that cannot make them penny stock, even if it does, it is temporary in nature.

AVAILABLE IN RELATIVELY NEW SECTOR

Again, newness of sector is a clue that a stock is within the range of penny stock. The era of dotcom in the 1990s proved this as many of the shares floated then was classed as penny-stocks.

BENEFITS OF PENNY STOCK

PENNY STOCKS HAVE HIGH GROWTH POTENTIAL

If there is any category of shares that promises rapid and sure growth, it is the penny-stocks. Because they are mostly in new sectors of the economy, they stand the chance of growing. Again, the product life cycle principle still hold true. We have three stages of life cycle VIZ: growth stage, maturity stage and decline stage. Same goes with stocks

PENNY STOCK REQUIRE LOW CAPITAL INVESTMENT

Unlike other forms of investment, you don’t need all the money in the world before you can invest in penny-stock. You need very little capital to start with and if managed well can outgrow your widest imagination. This is probably one of the most admired benefits of investing in shares.

PENNY STOCKS ARE HIGHLY LIQUID

By liquidity, I mean the state of being easily sold. Of what benefit will it be if you have shares as an investment and it rises to certain amount at a particular time but cannot be sold at that until the market looses momentum? I am certain you wouldn’t want to experience such? So, that is where the penny-stock investment comes into play. Invest in them if liquidity is an issue for you- am sure it should be.

PENNY STOCKS FULLY UTILIZES THE BENEFITS OF AVERAGING TECHNIQUE

Averaging technique is an old investment strategy that has been around for years. It simply means, buying more stock / shares when the price of the shares you have already bought falls. The reason for doing this is to allow you recover the losses and even make profit when there is little increase in price.

Penny stock allows you to manage this situation as the shares are cheap and would allow you to buy more when share prices drop.

MOVEMENT IN STOCK PRICE IS MORE SIGNIFICANT

You make significant profit at any upward movement is share prices. This though can be a disadvantage if the price happens to move the other way round. You will make more money if penny stock moves in the same percentage with blue-chip shares.

DISADVANTAGES OF PENNY STOCK

Just like every other things in life, we always have the bad side of everything that have good side. To this end, below are the downsides of penny stock.

CAPITAL INVESTED CAN EASILY BE ERODED

Just like leverage, if not in our favour magnified the pain in the same way it does with the gains we are to enjoy if things move in our favour.

NO TRACK RECORD AVAILABLE

You invest in penny stocks almost blindly as there are little past records available for you to do your investment analysis before investing in shares/ stocks.

MORE RISKY

The absence of track records makes it more risky and uncertain for penny stock investment.

I am sure that you now have better understanding of what a penny stock is, what you stand to gain as a penny stock investor, what makes a stock a penny stock, what a penny stock exposes you to (dangers), etc.

So, this is the time to take action and start investing in penny stock. Remember, the surest way to making wealth in abundance is through investment!

Comments

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    • chamilj profile image

      chamilj 

      7 years ago from Sri Lanka

      Very informative Penny Stock Article. Thanks sharing. Voted up!

    • Magdelene profile image

      Magdelene 

      7 years ago from Okotoks

      Very useful information, something I need to look into

    • investinginvest profile imageAUTHOR

      investinginvest 

      7 years ago from SCOTLAND, UK

      Thanks a lot Annaw, I am glad to know that you found this hub useful...Cheers!

    • annaw profile image

      annaw 

      7 years ago from North Texas

      Great information for new and inexperienced investors with minimal capital to invest

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