Penny stocks are those that have a very low unit price. They belong to companies that are just starting up or that have just listed on a stock exchange. These companies are usually not yet fully established and their details are not readily available. The management is not top notch, its revenue is mediocre, and its product is not very well known in the market. This increases their ‘speculative value’, which is the degree to which people can predict their status in the future. The price is mainly dependent on the demand-supply curve of these stocks in the stock market. Analysts and trending charts usually fail here; one just goes by the gut feeling and the general vibe on the market.
Serious stock market traders and analysts do not prefer to deal with penny stocks as a general principle. They would be more attractive to new comers in the stock market wanting to start with small trades. Bigger investors may include penny stocks in their portfolio if they are looking to make big money and are ready to take bigger risks. Your Personal Financial Mentor informs that these stocks also get support from employees of companies that are soon to go public, when they have strong reason to believe that the company will perform exceptionally well on the stock market soon after its opening. Unfortunately, some investors land up with penny stocks in their portfolio without having planned for them. When the high unit price of previously held blue-chip or mid-cap stocks plummets on the stock market, it causes them to enter the domain of penny stocks, and the traders can either take advantage of these at the opportune moment, or wait for the long term for them to regain their former price range.
Once stock market traders make a big win with penny stocks, the hunger for big profits becomes addictive. These huge profits are due to their low unit price, which makes even a rise by a small amount equal to a big percentage increase; profits of 200% and more are possible. Traders deal with a high number of shares in each transaction to get the most benefit from penny stocks. One should sell only when more than 80% profit is achieved, else their purpose is defeated.
These have a higher commission charged by brokers because they are not traded on the major stock exchanges; their trading volume is much lower and the brokers do not get as much trading business out of them. They give much faster results than the large- or mid-cap stock market, within weeks at the most. One cannot expect to reap dividends from penny stocks, unlike with the others as these belong to non-performing or under-performing companies. The company in which penny stocks are held has a good chance of being taken over by a bigger company, thereby benefitting its holders on the stock market.
Categories: Stock Market
I dub penny stocks as budget investments 🙂 Each one of us should invest whatever little they can as these investments cumulate overtime to help you sculpt the financial future you desire. I have been watching penny stocks of recent. Yahoo! Finance is my ultimate guide to help be track the market.
Great points, with penny stocks it is hard for an outsider to clearly see how a company is performing that’s why plenty of research must be done before investing. It also helps to have someone on hand that can recommend stocks based on their analysis of the companies finances.