Tips for New Penny Stock Investors
Penny stocks, also called microcap stocks, are small company stocks that have low share prices. Many consider true penny stocks to be stocks that can be bought for $1 or less per share, though some may consider stocks up to $3 or $5 to be penny stocks. New investors should consider the risks and benefits of penny stocks carefully before investing.
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Risk and Reward
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Penny stocks are a high-risk, high-reward investment. When share prices are very low, a small change in share value can amount to huge swings in investment value. For instance, if you invested in a penny stock that cost 10 cents per share and the stock value increased by one cent, your investment value would increase by 10 percent. This can lead to very rapid gains and losses. Another risk of penny stocks is that small companies often have no proven track record and are much more likely to fail than large companies, like Wal-Mart or CocaCola, that trade on major exchanges. According to the United States Securities and Exchange Commission, "investors in penny stock should be prepared for the possibility that they may lose their whole investment."
Information
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Researching the companies you want to invest in is important even when you are investing in large, well-established companies. Large companies that trade on major exchanges publish stock and financial information and make it available to shareholders and the public. According to the SEC, "The biggest difference between a microcap stock and other stocks is the amount of reliable, publicly available information about the company." It may be difficult to find information on penny stock companies; if you can’t determine how a company brings value to the market, you should not invest in the company. Microcap stocks are particularly vulnerable to fraud, since there is often so little information available about the stocks. Unscrupulous people may use mass email spamming, Internet advertising and cold calling to try to attract investors to fraudulent investment opportunities, often touting guaranteed returns and huge profits.
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Start Small and Stay Diversified
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If you decide to invest in penny stocks, start with a small investment and keep your investments well diversified. Avoid devoting a large proportion of your assets to penny stocks. One of the best ways to mitigate investment risk is to spread investments across a broad spectrum; in addition to putting money in penny stocks, invest in normal stocks, mutual funds and bonds, and consider putting some cash in low-risk financial accounts such as certificate of deposits, money market accounts or high-interest savings accounts.
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