Stock Market Profits From Penny Stocks
One of the biggest drawbacks of investing in the stock market is the amount of capital needed to start trading. It can be difficult for traders with limited cash to make a start. But penny stocks are offer the opportunity to profit from a low investment. Continue reading to learn more about making money with penny stocks.
What is a penny stock?
You will need thousands of dollars to buy even a few hundred Microsoft or Proctor & Gamble shares because of their high share price. However penny stocks are offered by smaller companies with a very limited capital. These companies have not yet grown, so the shares are low priced, often just pennies a share. These stocks are also termed ‘Dirt Cheap Stocks’.
However, the definition of penny stocks may vary in different situations and for different financial institutions. For example, during 2004, Sun Microsystems termed stocks trading around $4 to $5 as penny stocks.
NASDAQ penny stock list
Penny stock based companies often find it difficult to survive in the market but those which manage to survive can be found in the NASDAQ penny stock list. Usually their stocks trade from $10 to $100.
Though penny stocks may have a low per share value comparing with other company share, they still have a total stock market capitalization of around $18 billion. You will be surprised to know that many traders are making a fortune out of penny stocks and many of them started their investment with a small amount of capital.
Advantages of penny stocks
You can buy the penny stocks at prices ranging from below $1 to $100. This is a great advantage of trading these stocks as you can buy more stocks with your limited capital. This also allows you to diversify your capital across a greater selection of companies.
Also investing in penny stocks gives you the opportunity to gain expertise on the trading skills while putting a limited amount of capital at risk. The fact is it requires the same kind of knowledge and understanding of the stock market to trade stocks of Microsoft or of a limited capital company.
So penny stock market can be a useful learning ground for new traders.
One major advantage with trading penny stocks is that a small price movement may equate to a significant percentage increase. A 20 cent increase on a $1 stock is a 20% return, and movements like this can occur frequently with penny stocks.
Risks of penny stocks
Penny stocks are very risky. If you buy them, it is likely that you will lose your money, so be aware of this. Many of the small companies will never be successful and will ultimately fail. Penny stocks are for high risk / high return traders.
Investing in penny stocks can be risky because of the limited number of share holders involved with it, and the large percentage movements that can result from changes of only a few cents. This makes the stock market quite volatile which can be equally risky and profitable.
There is very little information available, which can make it difficult to select investments.
There is significant influence of scammers in the penny stock market because small numbers of trades can influence prices significantly due to the low market capitalization of these stocks.
The scammers may penetrate the market by buying a large amount of shares of a company and then creates a positive impression of that particular company in the market. Based on this the demand or value of these shares rise rapidly.
Scammers then simply sell their shares in that increased price which get sold like hot cakes. This is also termed as dumping. The average traders then find themselves in a position with holding a large number penny stocks of that particular company without any buyers available to buy them while the scammers use them to exit the market with a huge profit.
It is important to never follow trading tips received through spam as the scammers use this to manipulate penny stocks.
Pages: 1 2
Tags: penny stocks, Stock Trading