Posts Tagged ‘Penny Stock Investing’

Penny Stock Investing | Penny Stocks – A Blessing Or A Curse?

Many investors are taking notice of penny stocks and for good reasons, too. But first, we must agree on the definition that penny stocks are the shares that sell for less than $5 per share and traded over the Pink Sheets and the OTC Bulletin Board. Since penny stocks are also now trading in the Nasdaq to a limited degree, most investors now have greater confidence in these affordable stocks.

Blessings

The key to such confidence, however, is not so easily possessed. The successful investor must be able to strike a balance between the blessings and the curses of microcap shares. As with any other investment, it is important to do your homework with penny shares, perhaps even more so because of their inherent dangers but that’s getting ahead of the story.

There are many blessings to penny stocks. For one thing, these stocks are relatively affordable even to the ordinary Joes and Janes among us with their prices of under $5 with many actually costing under $1 per share. It is an opportunity to earn money from stock trading without worrying about the high capital investment required in blue-chip investments.

For another thing, microcap shares can earn for its trader a respectable amount of money within a shorter period of time. The high volatility of penny stocks makes for ideal business for day traders who thrive on fast trades within the day in order to earn good profits.

Curses

But just as there are blessings to otc stocks, there are also curses that can often eclipse the benefits. This is an experience for traders who have failed to pour sufficient time and effort on careful research, evaluation and analysis of the penny stocks being considered and, thus, lost their entire investment capital on the shares. Indeed, just as big profits can be enjoyed with penny stocks, big losses are equally possible.

The irony is that the very thing that makes for great potential in profits also makes for great risk in losses – high volatility. The price per share of the penny stocks can swing wildly from one minute to the next that a profit at noon can become a loss fifteen minutes after with no hope of the initial capital being recovered anytime soon.

The curses of penny stocks can also be traced to the fact that there is very little, if at all, regulatory activities done on the issuing companies. For example, since the Pink Sheets is not a stock exchange per se, companies trading their shares in this electronic quote system are not required to comply with reporting requirements. As a result, investors have to resort to other ways to look at the company’s financial statements.

The good news is that these curses can be overcome with the use of fundamental and technical analysis tools. In the process, you can separate the promising small cap shares from companies that issue reliable financial statements, adopt transparent policies and actually have a sound business plan for growth.

In many ways, this is similar to investing in blue chip stocks except that extra caution is essential. Once the benefits come to the fore, these challenges are well worth the time, effort and, of course, money poured into the activity.