How to Investing in Penny Stocks

The world of investment is filled of a lot of opportunities. In order to make a sound investment decision, it is important that the investor fully understands the risk involved in any venture before committing funds towards it. Benjamin Franklin once said, "An investment in knowledge pays the best interest," as such, it is important to do your research. One of such investments is Penny Stocks.

Penny Stock, also known as cent stock is a stock valued at less than one dollar per share, hence the name penny stock, however, there are some penny stocks that trade at above $1; some trade for as much as $3 or $5. Most countries have restrictions when trading these stocks, and they are mostly traded outside the major market exchange, for example, in the US, they are not listed on the National Exchange and are traded over the counter on OTC Bulletin boards or Pink Sheets. Some companies that have traded penny stocks are Novavax, PlugPower, United Microelectronics Corp, Halcon Resources Corp.

Most stocks are thinly traded, especially those that trade for fractions of a cent. They are highly volatile and speculative, they are classified as micro-cap stocks because the low market price leads to low market capitalization and as a result of their speculative nature, they are considered high risk to the investor because of lack of liquidity, large bid-ask spreads, but that is not to say that money cannot be made when trading them. If I buy 1000 units of shares at $1.00 and the price increases to $1.50, I make a profit of $500 if I sell at $1.50. If the price drops to $0.90, I would incur a loss.

Most investors are cautious about investing in penny stocks because it is predisposed to the pump and dump scheme. This scheme occurs when investors or organizations buy millions of such shares, then claiming to have inside information about some favourable news from the company, drive up interest in the stock through newsletters, website, chatrooms, message boards or press releases, they persuade other investors to invest in the stock. Buying pressure pushes up prices, which causes people to buy into the "hype". The initial investors then dump the stock causing it to crash. Usually, when prices of penny stock rise too fast, the SEC can step in and halt the stock for further investigation, when this happens, the price can still rice or fall but investors have no control over their investments until it is made available to the public by SEC.

It is not all doom and gloom when it comes to investing in penny stock, it is important to know what you are doing, by applying the following principles:

· Do your research. The strength of a company is an important indicator of the strength of your investments, visit the company's website, and check out market indexes.

· Look out for buyouts. Every now and then, a company buys out a smaller business, some companies frequently launch new products, this can cause the prices of their shares to rise and where there is a rise in price, there is some profit to be made.

· Stick to Major Indexes traded on Exchanges. Although Penny Stocks are not traded on major exchanges, some low priced stock are listed on the exchange and are not as risky as those that trades OTC. Some large companies give penny stock as a ticker, a stock abbreviation which allows ease of access to market operations.

· Trade within your risk tolerance. Do not spend what you are willing to lose. Use stop losses, set an amount as the base point so that if the price falls beyong that point, you sell.

Investing in penny stock is not for the faint of heart. It is a gamble for investors who like and can handle risk, a number of investors have found success with penny stock, a little investment on the right stock can be life altering, if the stock is kept for a significant period of time in which the company performs well consistently.

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