Penny Stocks - What You Need To Know

These days, just about everyone has heard about penny stocks, and the reason for that is because the information is all over the Internet. Penny stocks are different from the conventional blue-chip or mid-cap variety of investment strategies. When you invest in these micro-cap stocks you are not risking as much capital, but you are risking at a higher level than would be true were you to invest in say IBM or Ford.

These blue-chip stocks are stable and have been for many decades. One of the key reasons penny stocks are attractive to investors is that they sell for pennies up to a couple of dollars per share. Once they mature and become larger companies or corporations, the value naturally increases. Think about that for a moment. That is long enough. Anyone can see that when you invest pennies and get dollars back you come out a winner.
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However, there is a lot of volatility involved with owning penny stocks. That means that a person can either see great gains or experience extreme losses in a very short time. The thing about penny stocks is that they take a lot of guts to invest in. Of course, knowing what you are doing can change that dynamic altogether.

You might want to watch out for promotional stocks because they are pretty much just like they sound. What happens with promotional stocks is that the owners have picked them up for pennies, and they are out to make as much profit for their investment as possible. They then get busy promoting their acquisitions. As long as they are promoting them, the price is most likely going up with new owners recognizing the value they represent.

Once they have reached an often predetermined price, the promoters/owners sell their shares placing them back into the general pool of stocks. They have made a killing on the stocks they promoted, but are no longer interested in helping to drive the price up, and unless someone else steps up to do the same it is likely that the price will begin to drop. What that means to the investor that was so sure they were going to make some good money on their investment is that unless they also bail, they will be left holding the bag.

One more thing to remember when dealing with penny stocks is that many stocks that are sold for pennies are small up and coming businesses. As these businesses grow, often times larger ones will begin to buy them up either to dissolve them and get rid of the competition or consolidate them into one larger company. When this happens, the stocks are replaced with an appropriate stock. You will receive notice from your broker that this has taken place, but you may be shocked to see that the numbers have changed drastically.

For instance, you may have owned 5,000 shares in company A, but those were replaced with 2,000 shares in company B when company A consolidated with company B. That could mean a loss of at least part of your investment if company B's stock did not compensate in value.

The object of this lesson is to encourage you to educate yourself before indulging in penny stocks. If you would like to receive a newsletter with the top penny stocks each week,checking it out!!