8/11/2010 Update: While I think penny stocks are risky, they continue to be of interest to many investors. I have found this Penny Stocks VIP newsletter that is 100% FREE to sign up for. All you have to do is enter your email and then click on the "confirm email" link when they email you. You will then be set up to receive their free VIP newsletter.
For years, people have been fascinated with penny stocks and the idea of making money by investing in them. One reason is that because they are so low in price, anyone can afford them. But are penny stocks a real investment opportunity you should be looking at or is it one you should never get involved with?
There are many definitions of what constitutes a penny stock. Some people consider every stock that is under $3.00 to be one while others make the cutoff at $1.00. No matter what you deem to be a "penny stock" the important thing is that it costs very little for a reason.
Some people believe that all stocks start out as penny stocks and grow from there. They might get this ideas because of the stats on some stocks which include all the different times a stock has split. Big stocks like Microsoft may have split so many times that after that has been factored in, it looks like the stock was originally offered for just pennies or a few dollars. Seasoned investors know, however, that Microsft and other high fliers like it were never offered for such low prices and the opening cost was much higher. The adjusted stock price is something you should understand before you make incorrect conclusions.
There are several things that make penny stocks much riskier than other higher priced stocks. One of the things is that in most cases, stocks that only cost pennies or a dollar or two are that way for a reason. When you get down to such low valuations, there is usually a reason why they don't cost more and that reason is never a good one. This makes most penny stocks very risky to buy but they continue to get interest from beginners and certain sectors of the market because of the "potential" upside.
Something that is the case with many penny stocks is a lack of history and information. They are often listed on "pink sheets" and anything there is not required to file with the SEC. This means you will be buying penny stocks without the usual scrutinization and regulation that is associated with regular stocks on the NYSE and Nasdaq. Of course even with regulation, things can go very wrong with any stock you buy as evidenced in recent years by stocks such as Enron that have gone bankrupt and lost investors millions. However, buying penny stocks can mean taking an unnecessary risk on something you know very little about. That is truly the stock market for dummies you might say.
Another problem with buying penny stocks for beginners is that with any stock priced so low, there is a lack of liquidity. This means that you may have trouble selling your stock because there are not enough buyers. Penny stocks are something that you should really understand before you get into them and you should only do it with money you have to lose. Too often, young investors who don't have much money choose to take shots at penny stocks just because they are cheap and they hope to find the next Dell or Google and end up losing their money.