Penny Stocks Tutorial – A Quickstart Guide

Known by other names like microcap shares and microcap equity, penny stocks are increasingly becoming popular in the United States and elsewhere in the world where these shares are being made available for trading. The primary reason for such increasing popularity is the relative affordability of the shares as compared with the prices on the mainstream stocks offered by the national stock exchanges like the New York Stock Exchange and Nasdaq.

Varying Definitions

In the investment world, there is not a single definition for penny stocks that every investor, issuing company and regulatory body can agree on. In fact, there are instances when the agreed definition by one group can be contradictory with more in-depth analysis.

Take, for instance, the official definition of penny shares as adopted by the Securities and Exchange Commission as well as stockbrokers, analysts and institutional investors. For these professionals, penny stocks are company shares that trade for less than $5 per share.

On the other hand, the informal definitions provide for a wider scope including:

  • Stocks trading for less than $1 per share with many even trading for just fraction of a cent
  • Issuing company has a market capitalization of either less than $25 million or $50 depending on the industry standards
  • Stocks trade in obscure markets like the OTC Bulletin Board and the Pink Quotes

Again, the definition of penny stocks will depend on the priorities of the investor. For example, a stock may be considered a penny security because it trades for less than $5 per share for one investor but not so for another investor because the market capitalization of the issuing company is at $75 million.

Varying Connotations

Like most securities in the market, microcap penny shares have their fair share of pros and cons. The trick is in finding the balance between the positive and negative aspects of penny stocks with the ultimate aim of making a good profit on an otherwise highly risky investment.

Lets’ start with the positive aspects of penny shares, of which the most notable are the following:

  • More volatile movements that can be generally predicted with the right stock tools
  • Larger price moves in the stock prices within a short period of time, thus, making for higher profits in a faster time frame
  • Provide for greater profit potential on a percentage basis
  • Relative affordability of the stocks such that even a small amount of money as capitalization is sufficient

In short, when the cards are played well, the possibility of earning a neat profit with a small investment capital is highly possible with otc stocks. Take note that the emphasis is on playing the cards well through careful research and analysis as well as the right timing.

On the downside, penny stocks are not for conservative investors because of its equally many negative implications. For one thing, the issuing companies are often not fundamentally sound in its finances especially where the upstarts are concerned. For another thing, the reporting requirements and regulatory activities for these issuing companies are virtually non-existent, thus, making the penny shares the riskiest investments around.

But still, with careful research, thorough evaluation and a good mentor, otc stocks can be good investment opportunities, too, although only for a short time.

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