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Definition of penny stocks, also known as micro-cap stocks, varies. Fund termed as a penny stock on the basis of its market capitalization and shareholder value. According to the U.S. Securities and Exchange Commission (SEC), the action is termed as penny stock if its share price below $5. However, many of the investors’ community believe that the penny stock is one with a share price of $ 1 or less. As junk bonds compared with bonds to investment grade debt market, penny stocks, compared with blue-chip stock markets.

If you’re going to invest in penny stocks you need to know the difference between penny stocks and other stocks such as blue chips and mid-cap. Although the performance of mid-cap and large cap stocks in the first place, the foundations, some analysts believe that the performance of a penny stocks in the first place, investor speculation. If we analyze the basis of 100 stocks penny, perhaps only two or three will generate high returns.

Despite the problems associated with penny stocks, some investors intend to invest in penny stocks because they believe that many of the blue chips today, such as, Microsoft (Nasdaq: MSFT) and Wal Mart (NYSE: WMT) was once a penny runoff. Nevertheless, the share prices of these companies are almost never trading for pennies, but it seems that way, if you look at the price adjusted for stock splits. Many investors ignore this fact.

Since many penny stocks are traded on the pink sheets and not scrutinized by SEC, you will be more difficult to find reliable information about them.

Penny stocks often lack liquidity, which means that investors will be difficult to buy or sell. The lack of liquidity often helps fraudulent investors to manipulate stock prices. SEC itself in Schedule 15G states that: “Investors in hot penny stock to be aware of the fact that they may lose all their investment.”

Smaller shares are traded on the OTC exchange has a greater chance of being excluded due to lack of compliance. If a particular company is not able to list its shares on the Stock Exchange or another has been restored, you can lose 100% of your investment. You should consider it seriously, if you intend to take long positions in a penny stock.

Some new investors are attracted by cheap stocks, given their low price and the possibility of substantial gains. There have been instances where penny stocks rose more than 1000% in a few days in the past, but this is extremely rare and often the price is not sustainable. There is historical evidence that most penny stocks lose their entire value. If you are a new investor, you should be aware of the risks.

If you still want to invest in penny stocks, no relevant studies of the foundations of society and ignore preconceived theories about the successes of penny stocks in the past.

By: Paulv Robert

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