How to Invest in Penny Stocks

With the wild gyrations of the stock market comes the unscrupulous brokers pushing poor investments, such as penny stocks. Even though the average worker can afford a couple of thousand shares of a penny stock, is it worth the gamble? Are there any decent penny stocks available?

The Securities Exchange Commission defines a penny stock basically as a speculative investment in a very small company which trades under $5 a share. Brokers often push penny stocks with big commissions built into the price. The shares are usually thinly traded, making price manipulation easy. Most penny stocks go out of business, often experiencing bankruptcy. Penny stocks are about as solid an investment as scratch-off cards.

Information on penny stocks is scarce at best as they are not registered with the New York Stock Exchange or the SEC. Their latest quotes are found in the Pink Sheets, which is now available electronically. Most don’t trade every day. Insiders of penny stocks often sell their falling shares to hapless buyers. Crooked brokers often run the prices up or down, leaving their unlucky customer with a loss.

However, there are some small companies, start-ups at best, trading under $5 a share, which show promise. These firms offer a competitive product or service. The company uses a business plan to pave the way to success. Company management can be competent and able to see their aims through. And the company is more assured of becoming profitable if they have the capitalization and cash flow to complete the job.

However, getting information on penny stocks can be tricky. A good broker can be a valuable source of information and data. He may have contacts in the business which can find the scoop on a company.

If you don’t have a competent broker, get the corporation’s latest prospectus. This will tell you all about their business, their product or service, their management team, their business plan, and any pertinent financial data. Manuals by Moody’s or Standard & Poor can be valuable. Try to locate periodic reports filed with the SEC, such as their 10-K, which is a wealth of information.

After you’ve done your homework and purchased shares of a promising penny stock, be prepared to hold it long-term. Start-ups take a while to become profitable. But if and when they do, they can be a valuable asset for your nest egg.

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