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What are penny stocks? How do I buy them?

A penny stock is a low priced stock of a small company.  The term penny stock is generally used when referring to a common stock that is traded at lower than $5 per share somewhere other than the major exchanges. These penny stocks are normally traded via services such as the Pink Sheets or the OTC Bulletin Board. The US financial markets frequently use the term “penny stock” in a derogatory way when referring to any stock, which is traded outside the main exchanges.  However, penny stock as defined by the Securities and Exchange Commission in the United States (SEC) is a low priced stock of a small company whether the stock is traded on the major exchanges or through other services.

Penny stocks can be traded in large volumes running into hundreds of millions.  However, many penny stocks are considered to be “thinly traded” which means that transactions only take place occasionally and the number of interested parties is limited.  Information on penny stock companies is frequently difficult to uncover.  This can make it easy to control the stock involved in an unfair or fraudulent way.

New investors are often persuaded to trade in penny stocks because of the low price and potentially short-term high gain.  However, many penny stocks lose all their value in the long term. This means that penny stock companies are considered high-risk investments.  Investors should make themselves aware of the risks involved such as a lack of liquidity, often poor accounting practices and fraudulent activity when investing in penny stock companies.  Penny stock prices often rise or fall by several hundred percent in just a couple of days.  This together with limited liquidity can leave penny stocks open to manipulation.

Penny stocks are usually purchased from listing services such as the Pink Sheets or the OTC Bulletin Board.  However, these listing services do not have to meet the same standards of the major exchanges.  For example stock which is traded on the Pink Sheets has virtually no regulations to meet, which are there to protect shareholders.

There are a number of free listings available on the Internet of penny shares to watch and these can help you make choices but you still need to do your homework.

Money can be made buying and selling penny stocks but the amount of profit you make is linked to the amount of work you put in to discovering the background of the company whose penny stock you intend to invest in.  It is possible to make huge profits but equally easy to take huge losses.