Fundamentals of Penny Stocks

Penny stocks are a unit of stock exchange that have a really low face value. Penny stocks are just like shares, but the difference is that shares attach a much higher face value than that of penny stocks. Like shares, penny stocks are also transferable – but unlike shares, they are very speculative in nature. Penny stocks are considered highly risky because of their lack of liquidity, smaller number of share holders, large bid-ask rates and limited amount of information that is disclosed to the public. In the western market, shares that are dealt in less than $1.00 are usually known as penny stocks.

Penny stocks come with a lot of risk attached to it but if you are lucky you can earn a small fortune while dealing with these stocks. Due to its low liquidity rate it, has the potential of turning into a large investment. If you buy $20,000  of penny stocks at $1.00 each and the price of the stock rises, then you might be able to earn $20,000 in a single day. This type of price rise is not usually possible in the case of other types of stocks, as more money is needed to invest in stocks that aren’t “penny stocks”. As a result, the capital investment needs to be higher that what it is in case of penny stocks.

Despite its perks, penny stocks are highly risky to deal with. They are price manipulative and thus the market can easily manipulate the stocks and that might result in a huge decrease in the price of these penny stocks. Apart from the risks of losing money, penny stocks are prone to scams as they are not regulated by national level stock exchanges. Because of its nature, the stock exchange deals with penny stocks in a different category; it’s dealt in a trade-to-trade basket. These stocks are to be delivered on the same day as you have bought them.

Now coming to the question where to buy penny stocks. Penny stocks can be bought from different investors. Like shares, you can buy them from investors who are willing to sell their penny stocks. You can also buy penny stocks directly from the company itself. The good thing about these stocks is that they are to be delivered on the same day you purchase them; there is no such waiting period and the paper work involved, and everything is minimal as compared to actual stocks that you buy from stock exchanges.

Penny stocks can also be purchased in the secondary market through various stock exchanges. It is always advisable that you buy your stocks from a government body or a stock exchange itself; that way your chances of getting into a scam will be minimal. If you are adventurous enough you can go ahead and buy these from Discount brokers. Discount Brokers will charge a higher brokerage for penny stocks,  so you need to consider different brokers and investment farms before you go ahead and place your bid.