Most people think of the major stock exchanges when trading stocks comes to mind. The New York Stock Exchange (NYSE), the National Association of Securities Dealers Automated Quotations (NASDAQ), and the American Stock Exchange (AMEX) are among those that first come to mind. A penny stock is a low ticket security for companies that are valued at under five hundred million dollars and often trade in low volumes. These stocks also trade on ‘Over the Counter’ exchanges such as the OTCBB or Pink Sheets.

The very fact that penny stocks trade at such low volumes increases the risks involved in investing in them. The Securities and Exchange Commission urges potential investors in penny stocks to be aware of the fact that the low trading volume of these stocks make it likely that in times of needs buyers will be rare if not impossible to find. Finding accurate quotes for pries is also difficult which increases the possibility of the investor losing his entire investment.

Despite the risks involved, penny stocks are often attractive investments to investors for various reasons. If you are new to investing and looking for the chance to return a high yield for a relatively low investment you are likely to come across some penny stocks. The attraction often lies in the fact that at such low prices any changes are often measured by the hundreds of percent this means that your investment can literally double in one or two days time.

On the other hand, the price of penny stocks can drop just as drastically and equally fast. Those who are inexperienced investors would do well to avoid penny stocks until they have a better understanding of how things work. It is also important to note that because of the relatively low ‘worth’ of the companies that are often listed on the OCTBB or Pink Sheets they are often considered questionable investments. Some of these companies have such a limited financial history that no accurate determination of their actual value can be made. Many of these companies are either very new or dangerously close to bankruptcy.

There is also a strong potential for fraud with some buyers artificially ‘enhancing’ or driving the costs by buying large amounts of stocks and raising the perceived value of essentially worthless stocks. Most investors who fall for this loose many when it comes time to sell.

It is important to remember that not all of these companies are frauds and many of them have a great deal of potential. Some are new businesses that are working hard towards their goal of earning a spot on the larger exchanges. Do your research in order to decrease your risks of landing with a declining or dishonest company. Investors are often convinced that one good investment can make them a nice tidy profit. While this is true it is better to invest in a company that is showing slow and steady growth than one you are hoping will sky rocket over night. Take the time and do your research rather than gambling with your investment.



By: Christopher Smith

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