How do Penny Stocks Work?

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How do Penny Stocks Work[wp_ad_camp_2]

Penny stocks, put in simple language are those stocks which cost very little on a per share basis. There are a number of scripts which are available for purchase at $1 or $2 and even sometimes lesser. Hence the name penny stocks has got to do with shares that are uniquely low in value.

Read also: Simple Ways To Trade Penny Stocks

These stocks are traded either traditionally or over the counter. Many of the stocks that are listed on NYSE often do not form a part of these penny stocks. However, this does not mean that all penny stocks are not traded on NYSE. The main point of difference is that these stocks are very low in terms of price.

These stocks are generally of those companies which are small in size and do not have the kind of penetration that big companies have. It is therefore quite common for investors not to find the right kind of information about these companies and their stocks which are traded as penny stocks. [wp_ad_camp_1]

  • Penny stocks function the same way as other normal stock. As more and more investors pick up stocks of a particular company, the value of equity of such shares grows up. As more and more people buy and sell and make profit in the bargain, the demand for the same grows up and volumes of such shares increases.
  • The main area of difference between penny stocks and stocks of large companies is that the former have a big amount of daily variance and are very vital to say the least. Big shares which also change many hands see very small change in their prices which could work out to a few percentage points. This in itself is considered a big change. On the other hand when we talk about penny stocks, even a change of few pennies or cents here and there could be drastic. Hence, both the reward and risk involved is quite high. While huge profits can be made just by a small movement upward, it could also mean total wiping off the entire investments within a few hours.
  • The volatility is both a boon and a bane as far as penny stocks are concerned. While the per share cost is quite low, speculators can play a role in either driving up the prices of a stock or pulling it down and that within a very short period of time. There is a lot of doctoring involved in these types of shares and as an investor you should be aware of the pitfalls. Speculators artificially push up the price of a share which evokes interest from financial institutions and they may pump in funds in such companies. This could also work the other way and funds could be moved away from a company within a very short period of time.

Conclusion:

While the intention with which penny stocks were introduced may be genuine, it would not be wrong to point out that there are many email scams that are also a part of such scams. These e-mails talk about scripts and paint a very rosy picture for the investors. Investors should not be always taken in by such advertisements, but should check, verify and perform due diligence before investing money in them.

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