subject: For What Reasons Should One Purchase Penny Shares? [print this page] More often than not, when an interested investor does researches to buy penny shares, there are many warnings that will make him or her want to reconsider the decision to invest. However, these things should not serve as deterrents if these investors really want to and have the money to capitalize on this market.
If an investor gets in early, it is possible to have gain substantially from a relatively small investment. The stocks have very low prices per share, with some literally costing just a penny per share. For those savvy enough to have a good exit strategy, it is possible to double or even triple their investment in just a few days or weeks. These stocks are issued by companies with products and services that have the potential to be in demand in the near future. For people who get in early, they can own penny shares that could be worth a lot more than what they originally bought them for.
When buying penny stocks, the investor has to be aware of the risks he or she is taking. The risks with penny stocks are higher than those in the major exchanges as nearly bankrupt companies may be offering this kind of shares. The potential for fraud with penny stocks is also high. That being said, not all stocks sold at $5 or below per share imply weak and bankrupt companies. There are also legitimate companies that are either new or established whose share prices were driven down due to a bear market.
If there is one thing that penny shares are known for, it is that the prices can fluctuate wildly. This is because the companies that issue these stocks can avoid regulation from the proper agencies as they are not required to release audited financial records. It is easy for insiders to act fraudulently against shareholders. Two common fraudulent practices done with insider manipulation are the "Pump and Dump" and "Poop and Scoop" schemes. The former scheme involves inflating prices to yield profit, while the latter scheme is done with the intention to drive down price so the perpetrators can buy shares at rock bottom prices.
Penny shares are not traded at major exchanges like the Nasdaq and NYSE. Instead, they are consigned to the secondary markets and listed in the Pink Sheets. Thus, there is hardly any information as most stocks come from newly formed companies. Included in the mix are those in need of serious cash infusion due to financial problems, or are on the verge of bankruptcy.
Doing due diligence is extremely necessary before investors buy penny stocks. Investors need to know the company and the industry well before putting money in this very speculative market. It is also wise for investors to consider investing only if they have the money to spare as the high potential for sizable returns on investment is countered by very high risks.
The challenge here is for the investor to be able to go through the all the information on penny shares and make the right judgment call on entry and exit.
