What are Penny Stocks and how do they work?
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Penny stocks are essentially the same as regular stocks, except the value of each share is significantly lower, hence the name.
While they are called Penny Stocks this doesn’t necessarily mean that they are bought and sold for a penny, rather it simply expresses the fact that they are a low cost investing option.
To meet the traditional definition of a Penny Stock the stock in question has to trade at or below $5 per share.
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What Are The Advantages Of Penny Stocks
You may be wondering why someone would want to invest their money in stocks that have such a low dollar value.
Well, there are a number of advantages to doing so, and if you know what you are doing you can actually make quite a bit of money in a short period of time with Penny Stocks.
Stocks are a staple of the investing world. when you own a share of stock you own a small piece of the company that issued it. When that company does well the value of the stock will generally go up, which means you will make money.
When the company does not do well then the value of the stock will generally fall, which means you are losing money.
Where do Penny Stocks come into the picture?
They come into the picture because they offer a unique opportunity to invest a relatively small amount of money and make a good return quite quickly. As an example, let’s say that you have $100 you want to invest.
You can choose to invest it in a company that has stock that sells for $50 per share. If that company does well you can probably expect the stock to climb a few dollars over the course of a few months time.
That means that you are making money, but after subtracting broker fees and considering other costs the profit for this type of investment is minimal.
Let me lead by example:
- Let’s say that you take that $100 and buy 50 shares of Penny Stock at $2 per share.
- The company does well and the value of the stock increases by .25 a share.
- Not much of a profit right?
- Well, don’t forget that you own 50 shares of stock.
- That means you made $12.50 off of your $100 investment.
That return is substantially more than you would make in most cases investing in a traditional stock.
Anyway, moving on – The major advantage of Penny Stocks involves buying power.
Since you can buy so many more shares of stock with the same amount of money that you would spend on a few shares of more expensive stock, your potential for earning a profit is much higher. On top of that, rather than having to wait years for the value of your stock to increase, when you own a huge number of shares of a Penny Stock even a small increase over the course of a day can add up to a decent profit.
The point here is that Penny Stocks offer the potential to earn a bigger profit in a much shorter period of time than a traditional stock can hope to.
Disadvantages Of Penny Stocks
Since you can potentially make a lot of money very quickly with Penny Stocks you may be wondering why everyone isn’t investing in them.
The reason for that is simple, they tend to be much more volatile than traditional stocks, which means that you can potentially lose your entire investment in a short period of time. So, there is a potential to make a lot of money quickly, but there is just as much of a potential to lose a lot of money quickly.
The other big disadvantage of Penny Stocks is that they are not traded on any of the major exchanges, which means that they aren’t regulated.
Since they are not regulated companies are not required to provide investors with the kind of basic financial information that a regulated company is required to provide. So, essentially you are kind of flying blind.
The good news here is that you can do your own homework and find out a lot of information about the financials of a company if you are willing to spend the time doing so.
Since you are investing your money when you buy Penny Stocks it’s definitely a good idea to spend as much time doing research as possible.
How Do You Buy Penny Stocks?
Since Penny Stocks are not traded on the major exchanges you may be wondering how you purchase them.
Zecco offers the LOWEST price per trade at $4.50 US. You can get 10 free stock trades each month when you maintain a balance of $25,000 OR execute 25 trades each month.
If you don’t meet either of those criteria, it’s just $4.50 per trade which is NOT bad at all. Something else noteworthy, they DO NOT require a $500 opening balance like some of the bigger boys like scottrade or e-trade There are obviously other sites you can check out, but I recommend this one for penny stock trading
Are Penny Stocks The Right Investment For You?
Like any commodity you invest your money in, determining if Penny Stocks are a good option for you will depend on your goals and your financial situation.
If you are looking for a long-term investment where your money is fairly safe and will yield a decent return after many years, then Penny Stocks are not for you.
On the other hand, if you are willing to take a bigger risk with your money, and want a bigger return in a short period of time, then Penny Stocks may be exactly what you are looking for.
The most important thing to remember about investing in Penny Stocks is that you have to be responsible, you have to know what you are doing, and you have to be willing to spend time doing research. If you are capable of doing all of this, then you may very well be quite successful buying and selling Penny Stocks.