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The definition of penny stocks, also known as micro-cap stocks, varies. A stock is termed as a
penny stock based upon its market capitalization and share price. According to the US Securities
and Exchange Commission (SEC), a stock is termed as penny stock if its share price is below $5.
However, many in the investor community believe that a penny stock is one with the share price of
$1 or less. As junk bonds are compared to investment grade bonds in fixed income market, penny
stocks are compared with blue chip stocks in stock markets. Trading in penny stocks are far more
riskier and speculative than trading in blue-chip or other mid-cap or large-cap stocks. Several
investors believe that investing in penny stocks is like gambling, that one has to be prepared for
losing money. Moreover trading penny stocks can be more expensive. Penny stocks are usually
traded in the Over-the-Counter exchange or on the pink sheets.
If you intend to invest in penny stocks you should know the differences between penny stocks and
other stocks, such as blue chips and mid-caps. While the performance of mid-cap and large-cap
stocks is driven primarily by fundamentals, several analysts believe that the performance of penny
stocks is driven primarily by investor speculations. If you analyze the fundamentals of 100 penny
stocks, perhaps only two or three would be generating superior returns.
Despite the issues associated with penny stocks, several investors intend to invest in penny
stocks, since they believe many of today's blue-chip stocks, such as, Microsoft (Nasdaq: MSFT)
and Wal Mart (NYSE: WMT) were once penny stocks. However, the share prices of these
companies were almost never trading for pennies, however it appears that way when one looks at
the price adjusted for stock splits. Many investors ignore this fact.
Since many penny stocks are traded on the pink sheets and are not scrutinized by the SEC, you
will find it more difficult to find credible information about them.
Penny stocks often lack liquidity, which means investors would find it difficult to buy or sell. A lack
of liquidity often helps fraudulent investors to manipulate the share prices. The SEC itself in
Schedule 15G states "Investors in penny stock should be prepared for the possibility that they may
lose their whole investment".
A penny stock traded on the over-the-counter exchange has a higher chance of being delisted for
lack of compliance. If the particular company is unable to list its stock on another exchange or
become re-instated, you may lose 100% of your investment. You should consider this seriously, if
you intend to take long positions in a penny stock.
Several new investors are attracted to penny stocks, given their low price and potential for
substantial gains. There have been instances where penny stocks rose more than 1000% in a few
days in the past, but this is extremely rare and often the price is not sustained. There are historical

2. evidences that most penny stocks lose their entire value. If you are a new investor, you need to be
aware of the risks involved.
If you still want to invest in penny stocks, do the relevant research into the company's
fundamentals and ignore the pre-conceived theories about the successes of the penny stocks in
the past.
Joel Arberman is the Managing Member of Stock Aware, LLC. We publish a free investment
research and analysis newsletter and offer investor relations and investor awareness services.
Learn more at StockAware.com
Article Source:
http://EzineArticles.com/?expert=Joel_Arberman
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