The term penny stock refers to stock that trades at or under $5.00 per share and is traded on NASDAQ or in the pink sheets. These stocks are traded in the over the counter market. Many people have made a lot of money investing in penny stocks. But there is a word of caution. You must know what you are doing. It is very easy to invest in penny stocks, but it is also very easy to lose money on penny stocks.
There are several types of companies that trade on the penny stock market. These include companies that no longer trade over $1 on the NASDAQ. These companies will include those that have fallen from grace due to scandal. These are very dangerous stocks to trade in because you stand to lose a lot of money if the company does not rebound.
Other companies that are traded in the penny stock market are new start up companies. These companies may be looking for money to expand their business and start out trading on the OTC as a penny stock. These are probably your best bet to trade in.
The first thing you should do is plenty of research about investing in penny stocks. Learn the terminology and learn how to read the pink sheets. Be very careful of the penny stocks that you choose to invest in. Read manual's such as Moody's and Standard and Poor's to get accurate current financial information on the companies that you are investing in.
The penny stock market is a hot target for fraud. You must know how to recognize fraud to avoid losing your investment and then some. The warning signs of fraud include:
- High pressure sales techniques. Investment in a good legitimate company is a long term process. It is not going to skyrocket overnight. You should have a few weeks to decide if a stock is right for you. If anyone tries to pressure you by saying otherwise, walk away.
- Not knowing how the money is being spent. If a company cannot inform you of exactly what they are spending your investment money on, with documentation, then it is best to steer clear of them.
- Unauthorized transactions. Keep a close eye on your accounts and be on the lookout for securities that you did not agree to purchase. Some brokers will try to pressure you into buying the stock after it is fraudulently placed in your account.
Investing in penny stocks is a gamble. Millions of dollars are lost each year in the penny stock market. But if you do your research and really study the market, you can make a decent amount from penny stock investing. Knowledge is the whole key to success in the penny stock markets.
by the FreeArticles.com
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