There are many opportunities around us all the time. Some people manage to spot the opportunities and try to use them to their advantage while others just miss out. Penny stock is one such opportunity that exists in stock markets all the time. But these penny stock opportunities come with a lot of risk. In order to make use of this opportunity, one must exercise a lot of caution.
What are penny stocks? Penny stocks are stocks that are priced at a very low value, usually less than $5. Most of the penny stocks trade outside the formal stock exchanges like NASDAQ and NYSE. They mostly trade in Over The Counter Bulletin Board (OTCBB) and Pink Sheets. This is mainly because they will not be able to comply with all the rules and regulations laid down by the Securities and Exchange Commission (SEC).
While companies that trade in the stock exchanges must follow all the rules, shares that are traded in OTCBB have to follow certain rules only. Companies that trade in Pink Sheets do not have comply with any of the rules, not even those related to public disclosure of financial statements.
The trick in penny stocks trading is to find the right stock, the value of which is likely to appreciate in future. The only way to get this right is by doing a comprehensive research on the company's fundamentals and soundness.
Some of the factors to look for in a company are its history of operations, profit earning capacity, ability of the management to handle problems, financial stability, demand for the line of products handled by this company, the price to earning ratio, growth factors, and the general environment in which the company is operating. If the above factors are favorable, then the investor can expect a good return on the capital.
There are some factors or situations that every penny stock investor must watch out for. If there are wild swings in the value of the invested penny stocks, then it means that some scam or fraud is happening and the investor must not let himself get lured into buying. A fraud called Pump and Dump is common in penny stocks.
Many kinds of manipulations are possible in penny stocks because of their low trading volume. The scammer will buy a huge amount of shares and this will increase the value of the share. This can induce other buyers to buy the stock. Genuine investors may think that the stock is going up because of the company's performance. But unfortunately, it is because of the work of one or more fraudsters. As soon as the value goes up considerably, the fraudsters will dump the shares.
This will bring the value down drastically. In the end, the scammers would have made good money using this pump and dump technique while genuine investors would have lost their investment. One way to avoid being scammed is to do research and invest only if the company's fundamentals are sound. This can go a long way in protecting the investor's capital.
About the Author:
Nir Dotan is a writer and promoter of
Penny Stocks
services, and
Penny Stocks Preferred source for the latest news and information on the best and brightest Small Cap Stocks.
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86
Date Published :
Nov 21 2008