Low Priced Stocks - Should You Just Avoid These Cheap Stocks?

Nowadays, affordability is a big factor in our purchasing decisions for obvious reasons foremost of which is the quest for greater value for our money. Such a change of habits from pricey to easy-on-the-pockets has definitely spilled over into the way we invest in market instruments like shares of stocks in companies. Thus, we see the resurgence in the interest for the low-priced stocks known as penny stocks or penny shares.

But before you go jumping into the bandwagon, we suggest knowing everything you possibly can about penny shares. Unlike their pricier counterparts, penny stocks have more than their fair share of risks for reasons that will be discussed later. The good news is that penny stocks have great benefits, too, particularly in making a tidy profit for a small capital. You just need to know how to play your cards right.

So, what exactly are these penny shares? Can you actually buy these stocks for pennies? Can you purchase these shares through the stock market? Can you even make a profit in the thousands from your investment of pennies? All these questions have been asked by first-time investors of these low-priced stocks. Let's tackle them one by one and answer a few more questions in your head.

Penny stocks are the common shares issued by small public companies that trade in at less than $1 although other stock analysts put the trading amount at $5 per share. These shares, however, must trade in the OTCBB, the Pink Sheets and, increasingly, on the more reliable Nasdaq markets instead of the so-called Big Boards of the stock market, say, the New York Stock Exchange. So, the penny stock term has basis in fact since many of these shares actually sell for pennies, in a manner of speaking.

For example, you can purchase 1,000 shares for $100 in a small start-up company with great promise of turning in a profit in the near future. The value of the penny shares then shoots up and, at which time, you can sell these stocks for a profit. Indeed, these low-priced stocks are within the reach of everybody with even a small amount of money on the side for investments.

But there are risks to investing in penny shares that every investor must know regardless of the amount placed into the enterprise. For one thing, these shares are subject to high levels of speculation so much so that even the barest whisper of trouble can send formerly profitable companies into a tailspin of bankruptcy. For another thing, most of the companies issuing these penny stocks are often highly illiquid. When such illiquidity is coupled with the lax listing and reporting requirements, you have a case of investing in a company with one of your hands tied and one of your eyes blindfolded.

Fortunately, there are effective ways to mine the benefits of these low-priced stocks such as:

• Do your homework. Many other resources can be found to research on the possibility of profit on whatever penny stock company you may be interested on.
• Look for companies that will be liquidated in the near future; that are in the process of mergers; and that have large stable companies as shareholders.

Don't dismiss low-priced stocks just because these seem low-brow compared to the blue-chip stocks. Wealth can be found even in the cheapest of things, too. Read our how to pick penny stocks guide for more.