A penny stock is defined as a stock of a corporation that trades under $5.00. Penny stocks tend to be issued by young companies looking to fund their business development and growth plans. Because they are not established like blue chip corporations, penny stocks investing carries considerable risk. If a company successfully executes on its objectives, the return on investment on a penny stock can be many times over.
A penny stock is traded on various exchanges such as the Bombay Stock Exchange Small Market Cap and the National Stock Exchange. A good candidate for a penny stock investment is a company that is up to date on its financial reporting and there is good liquidity in its shares. Getting your buy or sell penny stocks order filled should not be difficult.
Why Invest In A Penny Stock
The reason is straightforward. The person buys a penny stock in hopes of getting incredible returns. The investor can buy a more solid blue chip stock that will probably generate steady returns over the long run. For hyper return on stock investments, a penny stock offers that possibility. It is easier for a corporation with $5 million in annual sales to substantially increase sales many times over than for a company with $5 billion in annual revenue. A lot of the major corporations we are familiar with today originally started out as a penny stock.
How To Purchase Penny Stocks
In order to buy penny stocks, the individual needs to have a brokerage account set up. Because penny stocks trade in small dollar amounts, the broker commissions can easily wipe out any profit that is made. As a result, the investor needs to pay attention to transaction costs and other fees. The solution is to set up an account with an online stock broker that offers low commissions, reliable execution of trade orders and market research.
The Risks Of Penny Stocks Investing
The returns on the right penny stocks can be substantial but the risks are also very high. Many of these companies have recently been formed. Their products, client base, technologies, and operations are still not sufficiently established, putting them in a vulnerable position relative to their competitors. Some companies do not have clients or revenue since their products are not yet ready to be commercialized. The risk in this situation is the company runs out of funds before the products are ready to hit the market. The possibility of failure at this stage of company development is still high.
What To Look For In Penny Stocks
The investor can pick from thousands of companies that are classified as a penny stock. To pick a promising penny stock can be a daunting task. To increase the odds of selecting a winning penny stock, there are certain things that the investor should look for in the company. An experienced capable management team is essential to guiding the company through its initial stages of expansion. A company that is current with all the financial reporting means the investor can properly value the company’s worth per share. It is also a sign that the company has sales and profits. The company has a significant cost advantage relative to their competitors.
The offerings of the company are unique and desirable to their intended clients, allowing them to charge a premium and potentially dominate the market. The product or service offered by the company has no true competitors and is in a market of its own making.
Don’t Ignore The Financials
A company’s financial statements provide valuable information for the investor. It shows the progress of the company in building its revenue either at a profit or at a loss. They also provide figures to calculate what the intrinsic value of each share is worth relative to the market price. Intrinsic value per share is what the company is worth after it is liquidated, divided by the number of shares issued. A buying opportunity arises when the market price is less than the intrinsic value of each share. The downside risk to the investor is limited since the shares were bought at a discount to its book value.
Where To Get Information On Penny Stocks
Thanks to the Internet, getting the necessary information on the companies of interest is readily available. Furthermore, most of the information you need is available free of charge or for a modest fee. There are financial portals that provide a good deal of the data needed. They include stock quotes, price charts and the latest news about the company in question.