Investing in Penny Stocks

Penny stocks are companies stocks that are valued at less than 30 cents depending on which market you invest in. In the US the Over the counter bulletin board, in the UK it is most likely to be the Alternative Investment Market AIM or perhaps on the FT SE all share index.

The difficulty in investing in penny stocks, tend to be the common faults. A company with a 43 cent stock listing does not usually have a significantly long company history, and its profitability is a grey area. The market trade by volume is also lower than in the main stock markets. The buy and sell spread tends to be much greater, also there is likely to be a minimum buying and selling amount. The transaction costs are relatively low and can be bought and sold via a stockbroker, or on line broker that facilitates trading in penny stocks.

Ways in which to pick penny stocks, well on the OTC-BB there are a latest announcements section. Upon a company making an announcement into its earnings, project news, rights issues are all available to view this information for investors. The volatility in the penny stock movements can be far greater than main market movements.

Due to the relatively low stock valuation a good announcement can send the shares 5-100% higher within minutes. A bad statement will greatly drop the price valuation of a penny stock fast. Investors as a result can have the option to day trade much more effectively than buying a stock on the Dow Jones or FT SE market. In the FT SE and Wall street, these shares tend to be significantly larger in size and bigger financially structured companies than those trading on the OTC-BB.

However like all investments, these carry risks, most if not all penny stocks are unlikely to pay stock holders dividends.

Research. This is very important, you have an idea which particular sector to invest in. Don’t look at share tips as being great idea’s for investing in penny stocks. Share tips in the short term and over time are worthless.

It is important also to look at a number of variables in investing in penny stocks. On the OTC-BB will be displayed the %highest movers, % $ winners and losers. Though I cant offer any investment advice I would invest in these area’s of companies stocks, that made positive news upbeat statements. The share price against each stock companies that make recent announcements, or in a day or two gone by tend to be the most actively traded stocks on a given day. There is also value in quickly, and I mean quickly researching these companies and fast finding key information on that company. The market does move fast, and it pays to move fast and see an initial rise in the share price graph on an hourly basis.

On a portfolio basis, say if an investor had $10,000 to invest, it would be foolish to invest all $10k in penny stocks. These stocks are volatile, the movements are sharp and potentially hazardous to personal wealth. As a result I would consider risking less than 10% of any fund value in this area.