Penny Stocks

I’m sure you’ve heard amazing success stories of people who invested in under-priced stocks and made a fortune.  It may seem that the most likely candidates for such great gains are the stock shares priced the lowest.  There is no place for these stocks to go but up, right?

As with most topics within the stock market, it’s rarely this simple.  The cheap stocks that I’m referring to are more commonly called “penny stocks.”  For the sake of clarification, I define a penny stock as any share that is valued at under $3 per share.  Just because stocks are priced so cheaply does not mean that the company is worth less.  For example, if a hundred million dollar company had issued 100,000,000 stocks at $1 a piece, the company would be worth the same as a company that had issued 200,000 shares at $500 each.  While this is very rarely the case, it illustrates my next point: if you are going to invest in any stock, research both the technical and fundamental factors of that company prior to investing.  Penny stocks are not different from any other stock in this regard. 

In fact, penny stocks may be more volatile than other stocks.  While this doesn’t necessarily apply to every penny stock, there may be a good reason why the particular stock is priced so cheaply.  It may be that the company is taking a slow ride towards bankruptcy.  The stock may have once been priced at a more respectable exchange-supported price.  (To be carried by a specific stock exchange, shares of a company must be above a given price.  This price differs depending on the exchange.  Penny stocks are not traded in the NYSE.)  If a stock is classified as a penny stock, it may have been once carried by a major exchange and inadvertently become a penny stock. 

Does this mean that you should avoid all penny stocks?  Not necessarily.  Just because a stock is priced below an exchange-supported price doesn’t mean that it will not increase in value.  An obvious example of this is when stocks are first introduced.  As a marketing gimmick, sometimes stocks are priced very cheaply when they are first brought to the market.  Obviously, these stocks will quickly increase in value, so they are an excellent buy.  As stated above, the investor must do their research in order to find which penny stocks are good buys, and which are not so good.

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