In the United States, the term "penny stock" refers to small company securities that trade for less than $5 US Dollars (USD). It should be understood that penny stock investing is not for everyone. Before investing, individuals should understand that these investments are subject to high levels of risk. Information about the companies that are offering these stocks is often limited or unavailable from normal sources, so a person will likely need to rely on unconventional resources. If a person finds penny stock companies in which she is interested, she should be sure to analyze their trading volumes and to limit the amount of assets that she devotes to these types of investments.
One of the first things a person needs to fully understand when considering penny stock investing is that cheap does not automatically equate to safe. Many experienced investors attempt to steer new or potential investors away from penny stocks because these investments can be quite risky. Penny stocks are different from other stocks in numerous ways. Before a person begins penny stock investing, she needs to understand these differences. One important difference is that, in many cases, these stocks are not under the authority of the United States Securities and Exchange Commission (SEC), so they are subject to fewer regulations.
Individuals who are accustomed to purchasing stocks after a detailed analysis of a company should be prepared to make decisions based on less information. In many cases, there may little or no information available, and investments may have to be made blindly. This is one of the reasons that penny stock investing is considered highly risky. Before a person makes the decision to act without information, however, she should do her best to obtain what she can, even if it is from unconventional sources. Investors must be aware, however, that false information is sometimes intentionally spread to influence the price of penny stocks.
There is potential to sometimes reap significant benefits from penny investments, however. Since there is so much risk involved with penny stock investing, it is important for individuals to carefully consider the portion of their assets that are used for this purpose. Some financial professionals suggest that investors should limit their portfolios to a maximum of 20 percent in penny stocks. Others, however, may suggest that this figure is far too large.
Volume is an important consideration in penny stock investing. This is because trading volume directly affects liquidity, so it must be carefully assessed. If the trade volumes for penny stocks in a particular company are minimal and a person buys shares, she is likely to experience a great deal of difficulty selling them later.
