Friday, April 27, 2012

Are Penny Stocks Really A Goldmine?

Anyone who tells you that the stock market isn't really gambling most likely has something to sell you, like a bridge, or twenty acres of prime national forest. Even if they do believe it, though, chances are that they've never dipped into the world of penny stocks. There is an element of extreme risk and reward that accompanies these stocks. On one hand, you can purchase thousands of shares of stock in these companies for just a few dollars. On the other hand, there's a reason that they're valued the way they are. The outlook isn't all doom and gloom, however. There have been some notable companies that started or became penny stocks over the years, and have returned sizable sums to long-term investors willing to hold on. Obviously, had an investor a working crystal ball, they'd never have to buy a lottery ticket again, and would quickly surpass even the greatest wall street tycoons in riches. Consider that a stock that trades for one cent per share increases to two cents, for instance. With 1,000,000 shares of such a stock, for which $10,000 was paid, the increase would double the investment to $20,000. A penny stock is any stock valued at less than one dollar. It may reach this level for any of a number of reasons. The company may have experienced a major decrease in valuation if, for instance, a product line failed or if a scandal is made public. There are less notorious reasons that a stock might dip below the one dollar level, as well. It may be a relatively small or obscure company that issues inexpensive shares to tempt more investors to buy. This is regularly seen in start up pharmaceutical companies that require cash investment for research, but may not as yet have struck upon any particularly useful medicines or treatments. All this doesn't necessarily mean that you'll be able to start trading on penny stocks anytime soon. Since the majority of penny stocks are of companies in trouble, they are typically traded on what are called “pink sheets,” which some internet-based brokerages shun from their systems entirely. You might be able to hold stocks that fall to this level, but you cannot purchase stocks being sold at this level. This is a safety measure that helps prevent investors from being taken advantage of. For the most part, stocks on the pink sheets are there for a very good reason, usually having to do with bankruptcy. There is also fraud that investors need to be wary of. The basics of the con work thus: a company or an individual purchases large numbers of shares of a stock. Next, they pay for advertising or e-mail campaigns that champion the value and “explosive” potential of this stock. Suddenly, investors see the price of the stock going up, and they begin jumping on the bandwagon. Meanwhile, the perpetrator of the scheme has sold off their shares, usually doubling or more their investment. There is no recourse for investors who dump large amounts of money into otherwise worthless stock hoping for a big payday. So, do you jump on the penny stock bandwagon? As with any investment, doing your due diligence will keep you out of trouble. Make sure the company is on the up-and-up, and don't buy into penny stocks that seem too good to be true. It's also wise to do as your parents taught you in these cases: Don't put all your eggs into one basket, regardless of how good the payoff appears to be.

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