Penny Stock Investing

What are penny stocks and why is penny stock investing something that so many investors are interested in purchasing.

Penny stocks are defined as a stock that trades under five dollars per share and trades on NASDAQ or in pink sheets. However, not all shares with a low price are penny stocks. A true penny stock company is typically not engaged in real business and will have less than four million dollars in assets.

Penny stock investing is based upon the bid and ask pricing model rather than a set price. The difference between the bid price (how much someone is willing to pay) and the ask price (how much someone will sell shares for) is the spread. A stock that is traded at a ten cent bid and a twenty cent ask means the bid would have to more than double just to break-even because of the miscellaneous charges upfront.

This means that the instant a transaction is executed, the stock is worth less than you paid for it and you must hold it until the bid price increases to an amount you find acceptable as a return on your investment.

There have been a myriad of problems with penny stocks and many have millions of dollars of loss associated with them. However, there are legitimate companies trading in pink sheets that can be profitable for the investor interested in penny stock investing. For example, investing in a new company just starting out and holding the investment as the company grows can eventually pay off.

Of course, there are still risks involved. You must choose the right company and understand their business market, the company must have a realistic, feasible, business plan, the company must be able to compete in their market, management must be adequate, and you must evaluate the company’s cash flow. When you are investing in a company expected to grow, you will most likely need to hold onto the investment of many years.

Therefore, penny stock investing is a high-risk investment and you must be able to withstand a loss of your investment. There is no guarantee that the company you choose will grow or even survive. Since penny stocks are easily manipulated, it is understandable that even attractive investments can be forced out of business.

Many investors find penny stock investing intriguing and enjoy playing the odds associated with stock that can be so easily manipulated. Keep in mind, as with most types of investments, penny stock investing is unpredictable.

Make sure you do your homework and consider all of the risks involved. Know exactly what you are willing to lose and make an informed decision regarding the future income generating potential of the company and their potential for growth.