Penny
stocks: Penny stocks are the small value shares that are generally preferred by
many people for investments. These shares can easily be purchased in pennies
and that’s why are preferred for investments. However the investment in penny
stocks is risky as you are not aware about the nature and background of the
company where you are investing your money. Therefore all the precautions must
be taken before investing in penny stocks and a thorough research about the
company offering penny stocks is helpful in deciding in favor or against a
specific penny stock.
Investment
in penny stocks: A wise decision and through research about the penny stocks
can be rewarding otherwise this is the highly risky market. You have to be
careful and should never purchase the stocks being offered to you almost free
or even in a few pennies. There are some good stocks on offer and in past a few
stocks offered at 10 to 20 cents have crossed the five dollar mark although
majority of stocks fails to do so.
Many
people see the investment in penny stocks as an opportunity to earn a few
dollars at the same time invest low amount so that the risk is minimal. People
get learning experience while trading in penny stocks. People also develop some
research skill about the companies offering penny stocks. It is good to learn
about stock market by investing a small amount and therefore the basics of
investment and trading can be easily understood.
Precautions:
As investment in penny stocks is highly risky and therefore some precautions are
necessary to avoid loss in this market. As the information about penny stocks
do not come from reliable source, you should get the second opinion from
another broker before making any investment in the particular penny stocks. Do
not purchase the stocks in hurry as most of the time the broker will not give
you sufficient time to make a decision. Think twice before making any
investment and do not invest too much in a single stock.
You
may get emails or phone calls about some of the penny stocks. The brokers or
companies pay for such phone calls or email spammers and therefore you should
avoid investing in such stocks. Many times lot of rumors is spread about some
of the penny stocks and you should be alert and never pay attention to such
rumors. It is better to consult financial consult or take second opinion before
investing in any penny stock. Many times companies or broker may mislead you y
offering free stocks or newsletters, you should avoid all such offers.
Summary:
Many penny stocks has grown tremendously in the past from a mare 10 or 20 cent
and crossed $5.0 mark. A lot of rumors prevails in the penny stock market so a
wise decision can give you some profit otherwise you may lose your money.
Penny
Stock Returns
Why
do people invest in penny stocks if they are so risky? The answer lies in a few
facts as well as a few misconceptions about penny stocks. First let us look at the positive side of how
penny stocks can be more profitable.
It
is a well-known fact in finance that risk and return have a positive
correlation. This means that an investment that carries greater risk will also
give higher returns. The reason for this is very easy to understand and is
almost intuitive. Suppose you had $10,000 to invest and two options A and B.
Option A is a secure government bond that gives you 5% return, while option B
is a higher risk investment in a company that will pay you only if it makes
profits. Assume that this company has a history of making 5% Profits over
several years and is likely to continue on the same lines.
That
is, you can expect to get a return of 5% in future years, but that is subject
to the company making the same level of profits. Where would you invest your
money? If the returns are likely to be the same and if you are a sane person, you
would obviously invest in the risk free option. Now suppose, options B were to
pay you not 5% but 15% consistently, you might be tempted to put your money in
it. In other words, a higher return can make you to invest in a riskier
venture.
Since
penny stocks are higher risk alternatives compared to regular stocks, the only
way they can attract investment is by holding out a promise of higher return.
How would a penny stock offer a higher return? This will be done not directly
by the stock or the company, but by market forces. The market price of a stock
is fixed on the basis of a few factors such as its intrinsic value and the
return yielded by it. The market price of a stock divided by the return it
gives is known as the price-earnings ratio.
For
example, if $10 stocks were to be traded in the market at $20, and the company
earns a net income per share of $1, the price-earnings ratio is 20. The
price-earnings ratio will be higher for solid stocks that are known to be
backed up by good management, have a history of consistent and good
performance, and are perceived to be stable. The price-earnings ratio for
stocks that are riskier, unknown and do not enjoy a positive perception will be
much lower. This means that as against the example of price-earnings ratio of
20 that we assumed for a stable and well-known stock, a penny stock may have a
much lower price-earnings ratio, say 3 or 4. Actual figures will depend on a
number of other factors also.
Because
of this, a penny stock will be priced lower for the same level of net income,
and will therefore yield a higher return on the investment.
Penny
stock picks
Penny
stocks- an introduction: If you are well
aware about penny stocks and want to invest some money in penny stocks, you
will be interested to know how to pick penny stocks. You will find a list of
many stocks being traded at the website of pink sheets and will be interested
to invest in some of the future Microsoft or Wal-Mart. This may happen only if
the investor picks a right penny stock otherwise he or she may lose the amount.
Limited
information for penny stocks: It is really very difficult to find information
on penny stocks, as there are reliable sources with us. First of all the
information provided by the company may not be the correct one and suppose if
the information provided is correct, it may not be relevant.
For
penny stocks we are not sure how to find information about the companies
offering penny stocks. These companies have to provide a very little
information to Securities and Exchange Commission (SEC) and get easily listed
at pink sheets. These companies are therefore not regulated by SEC, as is the
case with companies listed at NASDAQ or NYSE. Furthermore the history of the
companies listed at penny stocks is not available. The companies may be
bankrupt or new having no experience of business and thus can be highly risky.
A new investor should therefore carry out the research about the companies
before putting their hard earned money into the market.
The
next restriction on penny stocks is the limited liquidity. Sometimes it is
difficult to sell the stock, as you may not find the buyer for it. Having very
low liquidity, you may have to sell the stock at hefty discount causing you a
heavy loss. Sometimes the brokers manipulate the penny stocks in various ways
and may cause you sever loss so until and unless you do not understand the
basics of stock market avoid investing large amount in penny stocks.
Chances
of fraud: As the companies offering penny stocks are not scrutinized or
regulated by government agencies or The Securities and Exchange Commission
(SEC), penny stocks are more prone to fraud. Most of the times the companies
spread rumors about their financial performance and other related issues to mislead
the investors. Many times these companies take the help of media such as
newspapers, radio or email and hype about the penny stocks offered by them. You
may get several emails (spam) from their agents as well. These companies also
pay for some financial consult for recommending their penny stocks to the investors.
Picking
the right penny stock: Although the market of penny stock is highly risky, good
companies are also available at OTCBB and pink sheets. The actual understanding
is needed to identify the good penny stock and a lot of research is needed
before putting money in penny stocks.
Summary:
Picking of a right penny stock is the key factors for earning and you should
ensure yourself that you are picking the right penny stock. Sometimes a little
research can help you picking a right penny stock.