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Sunday, January 31, 2010

Why Do Investors Buy Penny Stocks?

Investors buy penny stocks for a number of reasons, some are financial gain, the hunt, and  inexperience!
Penny stocks can be found on all exhanges. Those exchanges include the Pink Sheets, OTCBB, NASDAQ, NYSE, and AMEX. The riskiest of these exchanges are the Pink Sheets, and OTCBB. Many of the companies listed on these exchanges are under funded and require additional capital raises. This activity generally poses additional risk for investors. Companies listing on the larger exchanges, AMEX, NASDAQ, and NYSE, tend to be more stable. However, stocks which have fallen below their required listing price can become very unstable because their listing status on these exchanges becomes uncertain. This uncertainty can cause stock prices to fluctuate greatly.
Investors who purchase these stocks on the pink sheets should have a great understanding of the market and its requirements for those issues to continue trading on the pinks. For instance, pink sheet stocks can lose their right to be traded, or fall to lower levels of quotation if they fail to meat minimum requirements.
There are five levels on the pink sheets. Those levels are OTCQX, Current Information, Limited Information, No Information, and Caveat Emptor. With each level the underlying securities become less liquid, and are subsequently harder to sell. These statuses can and do change often with little or no notice, and that's why trading pink sheets should only be done with a great deal of understanding.
Penny stocks traded on the OTCBB market are also risky. Many times stocks which were listing on higher exchanges choose to be listed on the OTCBB because it is easier to meet their listing requirements. Additionally, liquidity is a concern for penny stocks trading on the OTCBB exchange. Companies listed on the OTCBB exchange also rely on funding practices which can result in unfavorable terms for common shareholders.
Companies listed on the major exchanges, AMEX, NYE, and NASDAQ, tend to be more stable than those penny stocks listed on the other two exchanges. However, all penny stocks are risky, and should only be purchased with capital which can ultimately be lost.
Investors tend to believe that purchasing a penny stock creates a larger potential for gain. If the investor takes the time to review financial statements of penny stocks, they will find that the majority of them are already overvalued. However, some penny stocks do represent the potential for great gains, though many do not!
Some investors enjoy sifting through penny stocks seeking the diamond in the rough,the hunt. Their are a few companies which are under valued or represent a great deal of potential. These companies which have great potential require the perfect storm to realize great gains.
Many penny stocks are purchased by investors who are inexperienced traders. These investors are referred to penny stock investments by friends, family, and random sources. The random sources of information can be ads, email, or web pages. These sources are generally compensated to provide the information and they should display the compensation. If you ever find one of these sources of information you should look for the pages disclaimer and read it!
Don't buy a penny stock if you do not have intimate knowledge about the company and its situation.

All in my honest opinion, consult an investment advisor prior to making any investment decision!

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