A Short Explanation About Penny Stocks

Penny stocks are loosely defined as highly speculative stocks of up and coming companies that are valued at less than $5.00 a share. Unfortunately for you, many up and coming companies can have their problems when they are up-and-coming. If you do decide to get into a penny stock don't think that just because you spend $1000 on 500 shares at two dollars a share in the morning that there's any reason that in afternoon that $1000 can't turn into $50. So it is important to remember that if you're ever considering throwing a small amount of money into the ring, you need to be prepared to lose all or almost all of it.

While the whole stock market is just as liable for volatility as the penny stock market, many of these stocks are highly speculative. While McDonald's will always go up and go down, you're not nearly as liable to be susceptible to the travails of penny stocks with a huge stock like McDonald's. The amount of money invested in McDonald's and the amount of money the company generates every day, not only from it's stores but also from it's other investments, makes it far less volatile; you're not nearly as likely to ever get rich off of it but you're also not likely to lose your shirt either.

When you trade penny stocks though you are dealing with a class of stock that typically has a market capitalization (market cap) of less than $500 Million dollars; that is to say, the stocks economic size, equal to the stock price times the number of outstanding shares. Using a $1.00 share price as an example, a stock with less than a $500 million market cap has less than 500 million shares outstanding making it a very risky and speculative investment.

Penny stocks also may have beautifully written write ups of the stocks potential performance from "third party" reviewers; you can pretty well tell if the reviewer is no one you've ever heard of before or if they write for a publication that is not one you've ever heard of before or if the reviews you read on multiple websites are all the same, you have reason to be suspicious.