How Does A Penny Stock Work? - Helpful Info

Many people find penny stocks appealing simple because it allows people to invest

at a low price; thus, a lot of people have the question "how does a penny stock work" in their mind. To start with, penny stocks are relatively cheap price offered as low as $1 to $2 or even cheaper. Over-the-counter (OTC) services and pink sheets trade these penny stocks. Major stock exchanges such as NASDAQ, AMEX, and NYSE do not often trade these penny stocks; however, any stock traded at low price and volume can be considered as penny stocks. Penny stocks are usually traded by relatively new companies or by those companies facing bankruptcy; thus, they do not penetrate the market well and not enough information on companies trading penny stocks is available. Because of this, those interested in investing on these stocks ask the question "how does a penny stock work".

How Does a Penny Stock Work?

Penny stocks work basically the same as other stocks. An investor interested in investing on penny stocks buys shares with one goal in mind - to make a profit by selling the penny stocks to others. There is only one big difference between penny stocks and other commonly traded stocks - the big daily variance. Aside from this, the risks associated with penny stocks as well as the rewards potentials are higher compared to other forms of stocks. To explain it in details, when the price of commonly traded stocks is increased, the difference from the original price is very little. Penny stocks are different in such a way that the percentage of price changes is higher. However, you have to remember that that the cheaper penny stocks are traded, the higher risks. Nevertheless, when the price goes up, the rewards are higher as well. Thus, a penny increase in a 10-centavo penny stock share would mean 10 percent difference from the original price. This is a rate of return any investor would hope to have. Just have an open mind that when the price goes down, the decline in investment is also big.

Volatility is another common concern among the people asking the question "how does a penny stock work". If you really find investing on penny stocks appealing, you need to have an open mind on the risks associated with penny stocks investing. Because of the low volume of penny stocks traded, speculators can easily manipulate or drive up the prices of penny stocks. All they need to do is to put money into these stocks which will contribute to the increase in price. Investors will then easily be attracted and buy them. When this happens, the prices increase further. This is the time when speculators pull out their investments, driving the penny stocks back to their original price. In short, speculators gain, investors lose.

Those asking the question "how does a penny stock work" also would like to know if it's safe to trade penny stocks. Well, you need to be aware that penny stocks are usually used in email scams. Because information on penny stocks is hard to find, they can be easily manipulated by scammers. Thus, you have to make sure you get the exact answer to your "how does a penny stock work" first before proceeding to making your investments.

by: Mike Rogers..

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