Day Trading

I gave my daughter $250.00 to invest in the stock market and try to teach her a valuable lesson on responsible trading when she informed me that she had decided to invest in penny stocks. I had a few questions about them before I could tell my daughter “Good job” or “What were you thinking?”

What exactly are penny stocks?

Penny stocks are considered small cap or micro cap stocks. They average price of a share of this type of stock is under $1.00 per share, even though some people may define them as stocks that sell for less than $5.00 per share. Even though people’s definition of the monetary amount of penny stocks may differ, they are a few basics that every investor will agree upon.

What types of companies have penny stocks?

Smaller or newer companies often have penny stocks. Market capitalization, or market cap, is one determining factor of how small a company is considered to be. Market cap is defined as the total trading value of a company, it’s figured by multiplying the value of each share by the total number of outstanding shares. Most companies with a market cap of less than $10 million will have these types of stocks.

Where are these stocks traded?

Penny stocks are traded on the pink sheets or over-the-counter (OTC). You will not find them on the major stock exchanges such as the American Stock Exchange (AMEX) or the New York Stock Exchange (NYSE).

Are penny stocks a risky investment?

Penny stocks are considered high risk. One of the risk factors is the lack of market stability of the companies that offer them. Many of these companies are new to the stock and offer inadequate financial information to prospective investors due to their limited liquidity and high risk for fraud.

Are penny stocks rewarding?

Even though these stocks are considered high risk, they are becoming increasingly popular because they are also high reward stocks. Many savvy traders who purchase stock from large companies are thrilled with a 10% return, however, it’s totally within the norm to expect a return in the hundreds or thousands of percentages with penny stocks! They can start the day as a penny stock and by the end of the day they’re too high to be considered as such. If an investor knows to sell his shares before the price comes back down then they’ve just made an amazing profit, and in one short trading day!

Why are penny they so popular?

The best answer I have is the low cost of the shares and the minimal initial investment because they start for less than $5.00 per share! You don’t need a large investment portfolio or extensive knowledge of the stock market to start with penny stocks. In fact, there are programs out there that actually help you make penny stock picks and some of the programs even watch the market for you.

I must admit that I had to congratulate my daughter on a job well done, we found something that we can do together and it’s fun and rewarding!

Author: Myla Madson
Article Source: EzineArticles.com
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