What Are Penny Stocks?

A lot of people ask this question - what are penny stocks? What are the ways to build an investment portfolio by starting on these penny shares? Why invest in penny stocks in the first place? These are just a few of the questions that first-time traders in the stock market will be seeking answers from other sources.

You have come to the right place as this article will discuss the basics - what, where, why and how - of penny stocks. We cannot overemphasize the importance of knowing the theory behind the practice when it comes to high-risk investments like penny shares. Otherwise, you will regret ever thinking of trading in the stock market with the hope of getting richer.

So, what are penny stocks, exactly? There is no definition set in stone about penny stocks, which are also called microcap shares and nano stocks for reasons that will be obvious later on. The generally-accepted definitions of penny stocks, nonetheless, are as follows:

• Stocks trading at less than $1 per share although other experts peg the amount at $5 regardless of market capitalization
• Companies with market capitalization of less than US$500 million are said to issue penny stocks (This is the origin of the term microcap shares)
• Shares with highly volatile movements within a certain period of time. For example, shares can go up by 1,000% today but quickly plunge to less than 50% of its original value within a few days.
• Stocks that are not traded over the Big Boards like the New York Stock Exchange are considered penny stocks. This is because the Securities and Exchange Commission has deemed the issuing companies as non-compliant with the regulatory, market capitalization and other requirements. The most common venues for trading microcap shares are the OTCBB and Pink Sheets.

To do away with the confusion, first-time investors and traders will be informed by industry pundits about the status of the shares in the market. You can then take the necessary measures to protect your money from the dangers of microcap shares. Here are a few tips on this matter:

• Always do your research on the issuing company, on the industry in which the company operates in, and on the state of the economy in relation to how it can affect the nano stocks. Keep in mind that many issuing companies are fraudulent organizations while the penny shares themselves are high-risk investments.
• Be in the right state of mind when trading penny stocks. Emotions have no place whatsoever in investments simply because the activity involves objective mathematics. It also helps to remember that nano stocks alone will not make anybody rich beyond their wildest dreams but it can make you rich if and when you know what, why and how you are doing it.
• Go with the market trend. Basically, you want to work with the market instead of hoping that things will turn out for the better. The market will not accommodate any single person not even for Warren Buffett.
• Use a trading system. It will become your best friend when difficult trading decisions must be made.

Indeed, your answers to the question of "What are penny stocks?" will lead you to answers that may well be the start of your investment portfolio.