| Penny Stocks have been part of the American (and | | | | stocks as a high-risk vehicle; some of these risks are |
| to a lesser extent, worldwide) investment | | | | limited liquidity, indirect or incomplete financial |
| ecosystem since the 19th century. (This is, in fact, | | | | reporting, and out and out fraud. For people playing a |
| where the stocks got their names. Most penny | | | | day trading strategy, sudden demand on a penny |
| stocks trade in the range of 0.10-5.00 dollars in | | | | stock can create wide-ranging volatility movements; |
| current money.) Today we're going to first look at | | | | this also makes penny stocks difficult to short-sell. |
| the risks involved followed by how these types of | | | | Financial reporting guidelines on penny stocks are |
| stocks can provide investors with some huge gains. | | | | much less stringent than a listing on the national |
| A Penny Stock is a share offering to investors for | | | | exchanges; sometimes, a stock will de-list for a |
| companies that are too small or too new to get | | | | couple of days. In the wild and wooly area of |
| listed in one of the major stock exchanges. They | | | | investing - an investment type known as the Pink |
| have the potential for large growth on small initial | | | | Sheets - penny stocks have almost no regulatory |
| investments but they also have the risk of pump and | | | | requirement, with no minimum accounting standards |
| dump schemes. As with anything dealing with the | | | | and reporting guidelines. |
| OTC (over the counter) stock market, the | | | | This lack of standardization and lack of generally |
| appropriate phrase is buyer beware. | | | | accepted accounting standards makes penny stocks |
| Picking a penny stock reasonably means getting an | | | | very vulnerable to manipulation and outright fraud; |
| independent appraisal of the business model of the | | | | people who can pose as independent observers will |
| company selling the share. This is like buying shares | | | | run up the price of a penny stock, sell, and delist it - |
| of any other publicly traded company; you want to | | | | the classic "pump and dump" swindle. |
| understand the business model of the company, | | | | However, we don't want to completely scare you |
| what they do, what they make, who their | | | | off these types of stocks. There are plenty of |
| competitors are, and what their products are. | | | | legitimate startup companies that need to start |
| What makes penny stocks appealing in this is that | | | | somewhere. And if you can pick out a winner, you |
| most of the businesses that offer them are very | | | | will be rewarded handsomely with a huge return. |
| simple - a typical type os penny stock is a mining | | | | If you can spot a company that has a lot of promise, |
| company that's only profitable when the price of gold | | | | you can end up with a huge payday. Even if you lose |
| (or whatever metal it extracts) is above a certain | | | | on 4 out of 5 stock picks, that 1 winner will usually |
| price. Some oil exploration stocks are also valued this | | | | be such a large gain that you forget all about the |
| way. | | | | other stocks that didn't work out. |
| The Securities and Exchange Commission rates penny | | | | |