The Problems Faced By An Investor With Penny Stocks

ommonly referred to as small-cap stocks, the penny stocks refer to the common stocks which are traded over the counter. They have been defined as stocks with a share price below five dollars. Putting money in these stocks can be more dangerous than dealing with mid to large-cap stocks. The quick occurrences of severe and long lasting drops with no or less warning makes these stocks risky. Though at one hand these stocks carry high risks but at the other hand these stocks have ability for yielding rapid gains. Because of this factor as well as the low requirement of investment, attracts new investors for trading these stocks.

A clear idea about the difference between penny stocks and blue-chip and mid- cap stocks is significant for an understanding before investing in these stocks. The market performance of normal mid to large-cap stocks is, first and foremost, determined by fundamentals but the performance of the micro cap stocks is suppler to trader speculation.

The market capitalization of a company is derived by multiplying its share price with the number of outstanding shares. Therefore, this figure is the sum total value of all the shares of a company at a given time. So companies which have less number of shareholders than a mid-cap stock and carry their trades on a too small volume per day are known as penny stocks. And because of this reason these stocks are referred as speculative investments. Any unexpected fluctuation in demand or supply of these stocks will be noted speedily all through the whole framework.

Many investors have the notion that the blue-chip stocks, such as Google and Microsoft, were micro-cap stocks at some time. But only on a close study, one may be able to know that these companies have never traded their shares at par with these stocks, and the traders who have overlooked the fact have bought stocks with the intention of being able to catch another Microsoft.

The penny stocks lack liquidity as they are traded in lower volumes. The lack of liquidity of these stocks leads to stock manipulation by some deceptive investors. Many inexperienced investors show eagerness for trading these stocks and jump into the stock market only due to the potentiality of these stocks for making enormous gains. The traders should prepare themselves for loosing everything they have invested in these fast moving stocks in the same way as a gambler remains prepared for loosing everything during the gambling.