What Should I Do If I Intend To Invest In Penny Stocks?

Many kinds of stocks are traded on stock exchanges. The price, market capitalization, and the stock exchanges where these stocks are traded vary. Penny stocks are stocks with a low value and a low market capitalization. They are subjected to limitations in terms of listing and they have to comply with only a few regulatory standards.

Definition of Penny Stock
There is no standardized definition for penny stock. Many factors are taken into account by different people to determine whether a particular stock is a penny stock or not. The factors are:

Price of share: According to Securities Exchange Commission (SEC), if the price of a stock is below $5, then that stock is a penny stock. Many organizations have their own upper-limit for penny stocks.

Market cap of the share: A stock is categorized as a penny stock if the value of it's market capitalization is less than $500 million. The stock price of each share multiplied by the number of outstanding shares, gives the value of market cap of each company.

Place where it is traded: The stocks that do not trade in major stock exchanges like NYSE, NASDAQ and AMEX are called penny stocks. Another definition of penny stock is any stock that is traded in Over the counter Bulletin Board (OTCBB) and Pink Sheet Securities.

There is no universal definition for a penny stock mainly because these stocks can move in and out of the 'penny stock zone' depending on the value on a given day. However, the above factors are used to determine if a stock is a penny stock.

Risks
Though investing in penny stocks can give huge returns, there are many risks associated with it. These are high-risk investments in which the investor may even lose the entire capital.

The risks are very high mainly because the amount of financial and managerial information available about these companies is very limited. Since they are subjected to very few regulations, they do not have to disclose a lot of information. This makes it harder for an investor looking to buy these stocks.

These companies have only a few shareholders and the volume of trade is also very less. This makes the stock less liquid or difficult to sell. At any given day, the number of buyers will be less or maybe even none. Also, these stocks are more volatile and this can pave way for people to easily manipulate the stock price.

These stocks are highly influenced by sectoral changes. This coupled with lack of technical analysis and information about the company, make them a high risk investment.

Rewards
Penny stocks provide huge rates of return on the capital invested. Also, the amount of capital required is less. This makes penny stocks very attractive.
In spite of its risks, it can provide great returns on the investment. Before investing, every investor must be aware of the risks involved and must do a substantial amount of research about the company's financial health. When the right company is chosen, the returns can be very high.

About the author:
Nir Dotan is a writer and promoter of Penny Stocks services, and Penny Stocks Preferred source for the latest news and information on the best and brightest Small Cap Stocks.

More Finance information like Nir Dotan's at Credit-Voitures.com

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