What Are Penny Stocks?

by Charlotte Wood
(last updated February 21, 2009)

Penny stock has a nice ring to it; penny indicates inexpensive and we could always go for something a little less expensive, right? However, what exactly is a penny stock and what are the risks associated with it? While penny stocks may be cheap and exciting (and potentially lucrative), the risk factors needs to be considered and you need to decide whether or not it's worth it for your money.

A penny stock is any stock bought outside the major markets (NYSE, NASDAQ, AMEX) and isn't usually looked upon favorably by traditional investors. A stock is usually considered a penny stock if it has a market cap under $500M dollars. When you buy a penny stock, you're buying stock traditionally in a very small company that's trying to get going on the business track. Because the company is so small, the stock shares are unbelievingly cheap because the company is really just looking for investors so they can expand. Also, because the stock shares are so inexpensive, penny stock investors tend to buy a lot and spend a lot of money.

A very high level of risk accompanies this kind of investment, however. Events can go one of two ways: either the company will take off, potentially making you a multimillionaire, or the company will tank, leaving you with nothing. The outcome of your investment hits two extremes and you need to decide whether or not the risk is worth it for you. You also risk some degree of fraud when investing in penny stocks; without the company in the stock exchange mainstream there's little verification of legitimacy. Over-the-counter penny stocks are especially speculative because their legitimacy is definitely questionable.

If you can afford the risk, investing in penny stocks could be exciting and could lead to exciting outcomes, but you really just need to be careful. Use prudence when conducting this business and if anything seems out of the ordinary or fishy, back out of the deal. It's your money and you should be careful with it.

Author Bio

Charlotte Wood

MORE FROM CHARLOTTE

Get the Long, Beautiful Nails You Want

Have you ever wanted long, beautiful nails but for whatever reason it just never works out for you? The first thing to ...

Discover More

Finding Great Discount Perfumes

Perfume is fun to wear and can really be a great addition to any outfit, but sometimes figuring out how to afford perfume can ...

Discover More

Get Radiant Skin

Ever wonder how to get beautiful, radiant skin? The key to radiant skin is simple—you can have the radiant skin you ...

Discover More
More Money Tips

What is a Bull Market?

Pay attention to financial news for any length of time and you will undoubtedly run across the phrases "bull market" and ...

Discover More

Should I Get Out of the Stock Market?

Investing in the stock market has historically outperformed other investments such as bonds or CDs. There are three areas to ...

Discover More

Understanding the Stock Market

The stock market is easily very confusing and if you don't know the basics, even more confusing. However, in order to ...

Discover More
Comments

If you would like to add an image to your comment (not an avatar, but an image to help in making the point of your comment), include the characters [{fig}] in your comment text. You’ll be prompted to upload your image when you submit the comment. Maximum image size is 8Mpixels. Images larger than 600px wide or 1000px tall will be reduced. Up to three images may be included in a comment. All images are subject to review. Commenting privileges may be curtailed if inappropriate images are posted.

What is 7 - 0?

There are currently no comments for this tip. (Be the first to leave your comment—just use the simple form above!)