What Are Penny Stocks and Should I be Investing in Them?

List: Posted: 12/10/10

What are penny stocks? These are usually common stocks or shares that sell for less than one dollar and yet can offer a form of investing that might create an extremely impressive return.

It is interesting to note that penny stocks are those which have demonstrated a volatile or erratic pattern of earnings or revenue, and which are often viewed as high risk forms for investing. On the proverbial “flip side”, however, is the fact that someone who dumps a chunk of capital into penny stocks might be able to create an enormous profit in a very short period of time.

With this in mid, it is easy to see the appeal of the various penny stocks, but the question is whether or not they make sense for the modern investor. The answer is complicated because it involves a handful of factors.

For one thing, penny stocks come with much higher trading commissions and can often be extremely difficult to research properly. This is due to the fact that the penny stocks companies are traded in what are referred to as the “Pink Sheets” and this means that penny stocks are considered a secondary market. This tends to make it hard to find public information about the financial positions of the companies which offer penny stocks for sale.

Additionally, it is often somewhat difficult to liquidate penny stocks, because they are an OTC (over the counter) enterprise that many brokerages don’t manage. This is the reason that a buyer may end up paying hefty commissions when they want to sell off a highly profitable batch of penny stocks, or if they are trying to get out of a losing deal.

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