Whether or not you have large sums of money to buy penny stocks, this type of investment provides an option for investors with very high potential returns. The Security And Exchange Commission define penny stocks as anything less than five dollars, while others have a cap of three dollars. Either way, these are affordable investment vehicles for the average investor.
One of the most frequently asked questions is whether you can really make money from buying the best penny stocks. The short answer is yes, if you buy some of the more profitable quality penny stocks, but like anything there are risks involved.
Firstly, information is limited. In other words you will not be able to know as much about this company as you would a blue chip firm. Furthermore, the SEC has tried to regulate this type of stock, but if a stock is not listed on a major exchange, very little regulation if any is performed. Many of these companies are close to bankruptcy or struggling and that is often why their share price is in the pennies. Not all penny stocks are in this bad of shape however, as some companies just want to raise capital to expand their business or for research and development.
Perhaps the largest hurdle with this type of stock however is the lack of liquidity. When there is a problem with liquidity, many times it will be tough to move the stock and finding a buyer for the price you want could be near impossible. The secondary issue from lack of liquidity is that some investors can buy large amounts of the stock hoping to influence the price so that others may find it attractive to buy. Once the stock price starts to take off and the volume increases, they promptly unload their shares; a classic pump and dump scheme.
Despite the risks however, penny stocks continue to be attractive to investors. Many of these stocks fail miserably but there are some hidden gems that can easily gain 1000% in months or even days. If you want to profit with this type of stock however, you will need to do your homework in researching these types of companies. Investing in stocks is risky enough, and this type of stock is probably the riskiest of them all. But with risks, can come massive rewards even if you just hit that one largely profitable penny stock.