If you can tolerate investment risk and want to expand your investment portfolio, consider learning how to invest in penny stocks. Penny stocks are shares of the smallest companies that sell stock. These stocks trade at low prices, creating the potential for a large gain from small price movements. The downside of penny stocks is they are much riskier than regular stocks. Make sure you properly understand how to invest in penny stocks before making any purchases.

The SEC defines a company’s stock as penny stock if its share price is less than five dollars. Penny stocks are too small to trade on the large stock exchanges, like the New York Stock Exchange or the NASDAQ. These stocks trade on the over-the-counter bulletin board (OTCBB) or on the pink sheets, another over-the-counter exchange.

The market for penny stocks is smaller and less active than the stock market on larger exchanges. This creates advantages and disadvantages for penny stocks. The small market of penny stocks gives traders the opportunity to search for new companies with undiscovered profit potential. The high competition on larger exchanges makes it difficult for investors to earn high returns. If you are good at researching investments, you have a much better chance of earning large returns with penny stocks than with normal stocks.
Another reason penny stocks can offer high returns is because of their low price. A small price increase in a penny stock creates a large percentage return on your investment. If you buy a penny stock for fifty cents, a one dollar price increase grows the price by 150 percent. If a stock with a fifty dollar share prices increase in value by one dollar, the total investment has only grown by two percent. The low prices and high volatility of penny stocks gives talented for investors the opportunity for large gains on small investments.

While the lack of research and high price volatility of penny stocks can be an advantage, they are also the main problems with penny stocks. A small price drop in a penny stock creates a large investment loss. Many of these companies are new with uncertain earnings potential. It is much more likely for a penny stock company to go bankrupt than for a large company to go bankrupt. While the low share prices of penny stocks give you the chance for large gains, they also give you the chance for large losses and could even cost you your entire investment.

There is a lot less market analysis of penny stocks than of regular stocks. In addition, companies that trade on the pink sheets do not have to file their financial statements with the SEC. These companies do not face the same regulation and public scrutiny of regular stocks. As a result, it is extremely difficult to make an informed investment in penny stocks. Even if you diligently research a penny stock purchase, be warned that your information could be inaccurate or incomplete.

Dishonest firms capitalize on this lack of information in the penny stock market. There are numerous companies that market penny stock tips to investors. While some of these companies are honestly trying to help investors, others are trying to take advantage of investors. These companies want to influence penny stock trading to move share prices to their advantage. While you should always be cautious when trading on stock tips, be aware that the penny stock market is full of dishonest investment advice.

The final problem of the penny stock market is it lacks liquidity. If you want to sell a stock, you need to find a buyer willing to purchase your stock. For large companies on the major exchanges, this is rarely a problem. With penny stocks, it is much harder to find buyers, especially if your stock is dropping in value. If you want to sell your penny stock investment, you may need to offer a discount on its value to find a willing buyer. In some cases, you may not be able to sell your stock at all. When you trade in penny trades, be careful not to invest money that you may need soon as the investment may not be returnable.

While penny stocks can offer a profitable and interesting investment opportunity, they should not make up a large part of your investment portfolio. The lack of reliable information, poor liquidity, and high volatility of the penny stock market makes these investments very risky. If you want to invest in penny stocks, be sure to invest no more than ten percent of your total portfolio in these securities. If you come across a hidden goldmine, your small investment will grow significantly. If your penny stocks do poorly, at least you protected the majority of your assets. Keep this basic advice in mind as you continue to learn how to invest in penny stocks.