Penny Stocks

The securities which are low priced that is below $5, belonging to small companies or private companies which do not have an active trading market, is known as penny stock. These stocks are sold on the counter through quotation services like Pink Sheets and others.

These stocks are sold by small or new companies so that they can obtain capital to extend their business or start their business, it may also be issued for sale by small or new companies who need capital for their basic operations. Penny stock is generally sold at very low price which may be as low as the fraction of a cent.

Though the penny stocks are low priced and quite alluring they are very risky as the investors may lose their money very easily so many of the reputed investment firms refuse to deal in penny stocks. The risk factor is so high that there are chances that the investor may never see the stocks in the market for the second time and in the process lose the total amount that he has invested. Besides this many types of dishonest and fraudulent practices are done by the penny stock brokers thus robbing the investors of their total hard earned money which they have invested in penny stocks.

This does not mean that one should not invest in penny stocks. Though these stocks have a high risk factor, they can also give a high return as the stocks can be bought at a very low price and sold off at a very high price but this happens very rarely so the investor should keep some vital points in mind before investing in penny stocks. First of all an investor should find out about the credibility of the brokerage firm who deals in penny stocks. If they make high promises then the investor should be careful as these may be dishonest promises.

The investor should also be aware that in these types of stocks fraudulent practices are involved. The brokers may show a scale of high demand by selling their own stocks in the market and thus increase the price. Penny stocks have less liquidity than stocks of reputed companies.