Should You Be Investing In Penny Stocks?

If you are a risk taker, penny stocks are for you and you should probably be investing in them

. However penny stocks should not be 100% of your investment portfolio. Conservative investors should ordinarily stay away from these risky investments. These investments are attractive to most investors because of the potential high gains associated with these risky investments if one happens to find the right penny stock that will turn into the next Wal-Mart or Microsoft.

Every major corporation was a risky investment at one point and small businesses become big businesses each and every day. However, it is important to know that while some small businesses make it big, far more crash and burn. If you are not willing to live with this level of risk, these stocks are not for you.

Shares that trade for less than $5 are called penny stocks. While some of these risky stocks have gone from $0.25 to $25, far more have become totally worthless. They are still attractive because of the minimal cash outlay. These stocks are used by companies trying to acquire additional funding to finance growth initiatives.

Penny stocks are mainly used by companies for restructuring purposes and the revenue generated can be reinvested into the company. These initiatives may succeed or fail which makes up the risk associated with penny stocks.

If the restructuring efforts work and the company grows, investors in these stocks have the potential for great payouts on their initial investment. Investments in these stocks takes time and if an investor is not willing to wait, these investments are not for them.

Another risk associated with these stocks is that some scam artists use them to run scams on investors that are unaware because penny stocks do not trade on common stock exchanges such as NASDAQ.

Due to the companies not trading on common stock exchanges, investors can not get a lot of information on the companies because the companies are not required to show potential investors their books and are not scrutinized as much as larger companies on the common stock exchanges.

The question on whether you should be investing in these risky stocks or not is purely subjective. Unlike other investments, the potential for great gain is immense. In order to gain a lot, a lot of risk is usually required. If you cannot stomach the risk, you should probably look at other conservative investments with less risk and therefore less investment return potential.

There are many people who believe that in order to gain much, much must be risked and for these types of people, win or lose, penny stocks are a viable investment vehicle. These are the type of people who do great in these types of investments because they know that as much as there is the potential for great gain, there is also the potential to loss.

by: Terry Robbins

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