The first time I heard about penny stocks, I was somewhat taken aback. Can it really be that stocks come for just pennies? Or, is it just my imagination? Turned out that there really are stocks that sell for cheap which, are called penny stocks. However, such stocks are not that cheap, in fact, any stock that trades for less than $5 on the market is often termed as Penny stock. This is a casual definition of penny stocks.
According to Investopedia, “A stock that trades at a relatively low price and market capitalization, usually outside of the major market exchanges. These types of stocks are generally considered to be highly speculative and high risk because of their lack of liquidity, large bid-ask spreads, small capitalization and limited following and disclosure. They will often trade over the counter through the OTCBB and pink sheets. ”
While this is the general definition of penny stocks, in layman terms, any stock that trades off the prominent market exchanges around the world, maybe over the counter, or through pink slips are called penny stocks. This is again not that accurate of an explanation of penny stocks. Since, many companies that can be characterized as large on the basis of sales revenue or market cap, trade on the market below $5 while many small companies trade in stocks greater than $5 on the market. The prices of stocks are therefore not an indicator of the size or the magnificence of an organization.
There are a few pros and cons of penny stocks that attract speculative investors whereas repel cautious investors. As the saying goes, a coin has two sides, so does penny stocks. Speculative investors invest in stocks they think are good penny stocks. So, what defines a good penny stocks? Generally speaking, a stock that is easier to acquire without much of an initial expense that has a high volatility in the market and rapid as well as larger price fluctuations. Such top penny stocks are a gold mine for the speculative investors and are a landmine for general public. Even if general investors turn towards penny stocks to buy, they choose stocks that do not possess any of the cons of penny stocks such as being of small and untested companies, volatile, lack of dividends and the lack of reporting’s, like the blue chips. These turnoffs are a major reason that penny stocks till date remain the playing field for the savvy and risk loving investors.
After understanding, what penny stocks are and their pros and cons, the next thing in my fledgling mind was which penny stocks should I invest in? After some research and a couple of hours of brain racking, I found these few stocks worth dabbling in.
- Stocks of well known companies such as Sun Microsystems, Spring Nextel, Ford Motor company etc. are cheap plus great for beginners.
- 7 firms proposed by a few gurus on NASDAQ namely, iGo Inc., Harris Interactive, Spanish Broadcasting system, Emmis Communication, Alliance Fiber Optic Products, ICO Global Communications Holdings and Sirius XM Radio Inc.
The one advice propagated within the circle of Investment gurus is that when playing with such high risk stocks, stick to the basics of going with those stocks that have a healthy sales, growth, and strong earnings behind them.