penny stocks to watch What Are Penny Stocks? Low-priced, small-cap stocks are known as penny stocks. Contrary to their name, penny stocks rarely cost a nickel. The SEC considers a penny stock to be pretty much all the things under $5. And while there are sub $5 futures trading on big exchanges like NYSE and NASDAQ, as a rule investors don't think of these when asked to summarize a penny stock.
Most individual investors look at penny investments like Wall Street's Wild West, an untamed world including investing detached from all the glitz and media areas that comes with stocks that are traded on hefty exchanges. While the gains and losses can be comparatively impressive in the penny stock world, they're not in many cases heard about elsewhere. Just because you don't hear about dime stocks every day on CNBC doesn't mean that coin stocks are without drama -- take SCO Group, a new software company that brought on the wrath of usually the world's computer-literati when it made claims to the UNIX operating system.
Unfortunately, penny stocks have also garnered your reputation as a game filled with scams and crime. Indeed, penny stocks could be your wildest ride yet as an investor.
So then, if penny stocks usually aren't traded on normal exchanges, where can you buy them?
How to Buy Penny Stocks
Like any other stock you would buy, you can own shares of a penny stock through your normal stockbroker -- regardless of whether or not it's listed at a major exchange.
While cheap stocks listed on exchanges that include NYSE and NASDAQ aren't typically considered "penny stocks" with regard to se, they can afford a lot of the added benefit of penny stocks without quite so much risk. Those same exchanges have strict listing requirements, and while they perhaps not allow for as much of an upside compared to "true" penny stocks can, they tend to be reliable. More often, though, penny stocks trade on list services like OTCBB and Pink Sheets.
Over-the-Counter Bulletin Board, or OTCBB, is a quotation. Unlike Pink Sheets, which is a quotation publisher, OTCBB maintains listing requirements (though they may less stringent than those of an exchange). For this reason, OTCBB has a little bit of added authenticity.
Pink Sheets is a system that provides investors with quotation information of stocks that are registered with it. Unlike OTCBB, however, Pink Sheets isn't registered with the SEC and aren't going to enforce any listing requirements. Bottom Line: Pink Sheets assortments are risky.
The Potential Payoff of Penny Stocks With all currently the risk involved, why would anyone want to put his or her her money in a penny stock anyway? The help answer is volatility. Because penny stocks are prone to violent variation (volatility), many people believe that they'll luck out through a stock that will jump from $0.08 to $8 in two weeks. And it's happened. Scour enough expense message boards and you're sure to find success news from investors who made a mint while "playing the pennies." Companies that can successfully make the jump from any amount of money stock to power stock are rare, but when anybody find them they pay out in spades. Numbers transform quite a bit in the penny stock world, but investors have raked in gains over 1,000% in one couple weeks' time. The real trick is finding the particular right stock.
The Risks of Investing in Penny Stocks
Even appropriate penny stocks are plagued by very high risk. Couple principal reasons that risk is so inherent in dime stock investing are low liquidity and poor reporting expectations.
As investors saw most recently with the sub-prime lending market, liquidity hassles can be a huge deal for investors. And sleeker and lending, low liquidity plagues the penny stocks on a huge daily basis. Because penny stock investing is such virtually any niche area, even relatively low trade volumes can receive an impressive effect on a stock's share price. Depending to the Securities and Exchange Commission (SEC), "Penny options and stocks may trade infrequently, which means that it may quite possibly be difficult to sell penny stock shares once you pretty own them. Because it may be difficult to find insurance quotes for certain penny stocks, they may be impossible to finally accurately price."
What this means is that if you participate with penny stocks you may end up with that whole lot of worthless stock that you can't find rid of. Another concern for investors is the lack of most stringent reporting standards for companies whose stocks trade on the OTCBB or in the Pink Sheets. OTCBB does ask that registered companies stay current with SEC filings, truthfully those filings are the bare minimum -- well less than what an exchange-traded company would have to file. Since agents that are delinquent in submitting their filings to the SEC are still so accessible to individual investors, coin stocks have proven to be a treasure trove on behalf of dishonest people. That's one of the reasons that the Businesses has taken such an active role in making absolutely yes that the American public is protected from unscrupulous suppliers and individuals in the penny stock arena. For some broker to even sell you a penny stock, they are simply legally required to send you a document outlining often the risks of penny stock ownership. There's a
reason agents and regulatory bodies go to such lengths to make absolutely sure that you're not blindly investing in penny stocks; scammers are out there.
What's With the Penny Stock Junk?
Spam is the scourge of the earth. It fills today's e-mail inboxes with garbage and junk, and chances include if you get a decent amount of spam, one has seen messages designed to promote penny stocks.
But the spam isn't relegated to e-mail. Message boards, chat rooms, deliberation groups -- even advertisers on legitimate websites -- will most certainly be all home to their fair share of the posts. It goes without saying that you shouldn't go on the market and buy a stock that's praised in a sketchy e-mail, but some people do, and scammers make throughout of dollars off of unsuspecting investors.
One of the the majority of prevalent types of penny stock scams out there is truly the "pump and dump." In a pump and eliminate scam, the bad guys load up on a cheap and worthless stock, convince inexperienced investors to buy of which at inflated prices (pump), and sell their shares discount when the investors push the price up enough (dump). For help on avoiding pump and
dump scams, check out the SEC's article on the matter. How to Steal Those Pennies So now that you know the scary section of penny stocks, how can you cash in within the potential growth that they have to offer? Presently are three things you'll want to look for when picking a penny stock to make sure that any person don't get penny stuck: Underlying business, financials, and footnotes. When it comes to penny stocks, a company's underlying business model is even more important than it is in exchange-traded stocks. That's because the penny stock world is housing to "shell" companies that are legally incorporated, but don't have any business operations. Shell companies are a major opportunity for scammers, because they can be easily arrangement up as a "pump and dump" stock. Look available for companies with real, sustainable business operations and you'll develop into one step closer to finding a good penny sell. Like with any stock, a penny stock's financials are a particular essential tool for investors. But with penny stocks, your current question is more about the quality of the unforeseen statements. Does the company file on time? Who appeared to be to the auditing firm? Do the company's financials look nourishing? If you can answer yes to those three questions, it's time to stroll through the footnotes. In most companies, footnotes are an oft-overlooked, yet very important part of the its filings. And while you might be able within order to get by without reading GE's footnotes, miss the footnotes for a penny stock, and your portfolio might miss its mark. Since penny stocks are smaller
companies which is are more prone to things like related-party transactions while non-GAAP accounting oddities, don't walk around the footnotes designed for a penny stock. Conclusion Fact: Penny stocks are inherently risky. Fact: Penny stocks can be fodder for scammers. Fact: Penny stocks can make you a lot of money. Even sufficient reason for all the risks and drawbacks involved in penny stocks, many investors simply find that the potential windfalls generally well worth it. There's a reason that penny stocks and options remain popular among a brave clique of investors: Any amount of money stocks can deliver a very impressive return. Hopefully, you will have to find that your new penny stock know-how makes its Wild West of investing a little more tamable. Jonas Elmerraji is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous debt outlets, including Forbes and Investopedia, and has been included in Investor's Business Daily, in Consumer's Digest and relating to MSNBC.com. Educate yourself on targeted strategies on how to trade penny stocks
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