Penny stock investing is a kind of investing that concerns itself with “Penny Stocks” aka “small cap stocks” aka “microcap stocks.” These kinds of stocks are similar to common stocks except they are traded at very low prices. In the United States, a stock is termed as a penny stock if they are traded for less than 5$, not listed on any of the national exchange and some other specific criteria. Since these are traded at low prices, this also means that these stocks usually represent a company with low capitalization.
Penny stock investing have earned a bad reputation in the financial market since they are often a subject for manipulation and can be very volatile. However, this does not mean investing in them is a worthless endeavor. In fact, some small cap stocks have a skyrocketed from mere cents per share to a $20 plus per share or more. This can be an opportunity for massive gains for an intelligent investor. Nevertheless, due diligence is required to succeed in microcap stock investing.
How Is It Traded?
Penny stocks are traded differently in different countries. In the United States, they are often traded through Pink Sheets or OTC Bulletin Board. Most of the time, they are traded via over-the-counter. With the advent of the Internet, it is now possible to trade small cap stocks online. Since a lot of people have been victims to fraud and manipulation with these types of stocks, the Financial Industry Regulatory Authority (FINRA) and Securities Exchange Commission (SEC) have placed specific criteria before a stock is considered to be a microcap stock; and they also have placed tight laws and regulation to protect the majority of investors.
Penny stock investing began just around the time when people started to trade stocks. The only main difference is the technical criteria, which have been placed to define specifically what they are, have changed throughout the years. Also, rules and regulations that govern penny stocks have been changed several times as the financial markets developed.
It used to be that the main criterion of a small cap stock is the price, which is $5 or less. Nowadays, some other criteria have been added, such as minimum shareholder equity and market capitalization. With the additional criteria, it is possible for a company stock to go below $1 per share and still be considered as a common stock; and not a small cap stock.
One of the main advantages of penny stock investing is the potential huge gains. Penny stocks are usually volatile. For some investors, volatility is something to avoided, but some are attracted to it. With high volatility and small cap stocks, it is very possible to double your gains in a matter of days. Penny stock investing may result to huge potential gains since they can double in a matter of days to weeks; while regular stocks usually takes weeks to years to double-up. If you think of it closely, it is much easier for a 1 cent stocks to double-up to 2 cents versus a $50 dollar stocks to double-up to a $100.
There are reasons why common investors tend to avoid penny stock investing. For some, the primary reason is the volatility. While it is possible to double your gains in a short time frame by investing in them, it is also possible to lose the same amount of money within the same time frame. However, penny stock investing advocates would claim that the downside is limited while the upside is may be infinite. As an example, the worst case scenario of a 1 cent stock is to go zero; but on the upside, the 1 cent stock can go as high as 10$ or more (theoretically limitless).
Another reason for common investors to avoid penny stock investing is because they have a history of price manipulation.
Penny stock investing is regarded as investing with stocks are commonly regarded as stocks that are usually traded at $5 or below. In actuality, FINRA and SEC have already placed more criteria before a stock can be considered as technically a microcap stock. Investing in these stocks usually means you have to deal with high volatility. This could result to massive gains for the intelligent investor and potential losses to unintelligent ones.