First let us look at what a penny share is. A penny share is a share of stock that trades at near or under 5 dollars. In addition this particular company has a relatively low capitalization, a typical penny stock company will have a brief and often erratic history trading.
Not all companies that trade under 5 dollars are considered penny stocks. Lucent is a great example, and in my own portfolio I have several Chinese ADR’s (American Depository Receipts, basically foreign stocks trading in the United States) that I bought at under 5 dollars and have grown nicely.
Investing in penny shares may be sounding like a good way to get your feet wet investing, but pinch those pennies (pun intended). Before investing in a penny stock there are several things to consider.
If you are risk averse, don’t look twice at these investments. Most seasoned investors will cast a suspicious eye at these issues. Why you ask?
Several years ago securities regulators from the Securities and Exchange Commission (the SEC) reported that American investors lost about 6 billion (yes, with a B) dollars investing in penny stocks.
Penny stock fraud is very common, and chances are you, or someone you know, has been contacted about a penny stock.
Ever get those E-mails or faxes about a “hot stock tip?” Buy Super Money Making Security Company today! It is selling for 10 cents a share but has a target price for 100 dollars a share. You can’t miss. Invest now!
People are making big money this way. But not investors.
A common form of penny stock fraud involves a company being listed on the over the Counter Bulletin Board (OTCBB) and the owner of this company purchasing a large number of shares very cheaply.
The stock is then promoted (hence that fax you received) and the price does rise as people buy into this company.
The owner then unloads his shares at a marvelous premium, making oodles of money and the stock tumbles as shares are unloaded and the company proves worthless. You, my poor friend, are left with worthless stock.
I’ll admit, I was the victim of such a scam. Had I sold prior to the owner unloading his shares I would have made a tidy sum, but unfortunately I missed the small window.
If you are still convinced about investing in a penny stock consult the Stock Detective Web Site at www.stockdetective.com. At stock detective you will hear all kinds of horror stories that will convince you to stick to the established exchanges and far away from the OTCBB. If they can’t scare you away they also provide a tool to examine weather or not that fax you received is from a company that will benefit financially from the rise and crash of that penny stock.
Not all penny stocks are scams, do your due diligence and decide if it is worth investing. So, what is a penny share worth? It’s worth whatever you invest in it to the company. It stands a great chance to be worthless to you.
Unless you are a thrill seeker when it comes to your money avoid these securities issues.