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What Are Penny Stocks and Which Ones to Watch

June 27, 2014

Penny stocks about to explode

Ever wondered what penny stocks are?

Whoever thought a penny doesn’t go far has never heard of penny stocks. You will be surprised to know that these stocks are responsible for the vast majority of stock trading in the United States every day. But what are penny shares? Why are they hot favorites of both long-term investors and traders?

Penny stocks are stocks that trade for less than $5 per share. In the US, dollar stocks generally refers to any stock trading outside the major foreign exchanges. Many new investors are attracted by these stocks because of their low price and potential for rapid growth.

Micro cap stocks as seen by the entrepreneur:

Let’s take an example to better explain the meaning of small cap stocks to a businessman. Supposing you have a company that sells mechanical devices and everyone owning your device is happy with the quality you provide. You want to sell your device to the entire world, but are running short of cash and cannot manufacture the said product on a larger scale. So, you can raise that money by taking your company public and selling the stocks of your company to the common man.

If you sell your stocks at $1 rather than $10, it has a better chance of attracting the investors towards the company. They will be willing to give your company the benefit of doubt for $1 instead of $10.

Hence, for an entrepreneur penny stocks are a way to make their company public.

Micro Cap stocks from the trader’s point of view:

According to some traders, a dollar stock will mean a stock that trades for $1. Others will have certain categories into which a stock must fit before it is called a penny stock.

But all traders will agree to the fact that dollar stocks have the most potential to escalate in price and bring sizeable amounts of profits.

For traders, a penny stock will mean a stock that you sell as soon as they are in profit because they are too volatile to hold for a long time. In the investment world, the best time to gain money is to seize the first chance of profits the market gives you.

Micro Cap stocks as seen by the investment industry:

In the investment industry  stocks are simply opportunities. They are opportunities that can make returns that are unheard in any other type of investment. For brokerage houses, penny stocks serve as a major source of trading expenses. For new and upcoming companies they are a brilliant opportunity to grow and develop.

I hope that this information has answered the question of ‘what are penny stocks?’ There are many small stocks in the market, therefore take your pick and invest wisely.

All penny stocks may not give similar returns. Some penny stocks can give excellent ROI while others might not be so beneficial. While buying penny stocks, remember that they are extremely volatile, this is why it makes sense to sell them when you see their prices going up.

So, to conclude, volatile or not, high risk small cap stocks are here to stay. Why you may ask? Well, they represent an opportunity for traders to gain massive returns in the shortest time periods and brokerage houses they can be a huge potential resource of trading commissions. For fledgling organizations, they provide an avenue of growth. In other words, like it or not, penny stocks are an indispensable part of the great American dream!

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