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What Are Penny Stocks?

Technically penny stocks are those stocks that are traded for less than a dollar. That means the price of the stock is in pennies. Penny stocks are also referred as micro cap stocks or the junior stock. In reality most of the penny stocks have upgraded themselves to at least $5 per share and the Securities and Exchange Commission or the SEC has changed the definition of the penny stock accordingly. Though the term penny stock very much exists in the industry and largely referred to stocks that are traded in considerably lower price.

Though the price of the penny stocks is much lower than the mid cap or even the small cap stocks, it is a lucrative investment opportunity for the investors. The price of the penny stocks are generally more volatile than the small cap or the mid cap stocks and this is the volatility of the stock prices that have made penny stocks a preferred investment option for most of the stock investors. As the price of the penny stocks are significantly lower an investor can buy more number of stocks with the same kind of capital in the market. This also implies that the investor will gain more in respect of the volume of investment he is making. Despite of the fact that the difference in the price of the penny stocks is relatively smaller, as the buyers can hold greater number stocks they gain more when the price of the stocks is increasing.

But as the stocks are volatile in nature the chance of losing money while investing in the penny stock is also greater. Therefore, if you are not in a position to take losses, it is better not to invest in the penny stocks, however lucrative it might seem to you. As the biggest advantage of the penny stock is biggest negative of investing in the penny stock, that is the extreme volatile nature of the stocks, it is important that you have a close watch on the stock market if you are willing to invest in the junior segment.

The thumb rule for making successful penny stock investment is to follow the hype for the particular stocks. You need to select a few stocks and closely watch the market to see if there is a positive hype or news about those companies and make investment in the stock when you think it is the right time to buy.