|
Penny Stocks: A Good Investment |
|
||
|
|
|||
|
|
Penny stocks can be a tempting investment. The share prices are so low that most people have the tendency to believe that they make for an excellent investment because with the price being so low, it would seem that the stock can not go anywhere but up. This is sometimes the case, but if you are a neophyte investor, there are some things that you need to be aware of before investing in penny stocks. |
||
|
Penny stocks are defined differently depending on who you
talk to. Stockbrokers define them as any stock that trades below $5 per
share. Regulatory agencies sometimes classify them as a stock with a price
below $2. But, generally speaking, a penny stock is any low-priced
security that trades on one of two exchanges; the Pink Sheets or the OTC
Bulletin Board. The Pink Sheets are an exchange where most startup companies
first get listed. There are no listing requirements to be traded on this
exchange. A company does not have to have any sales, nor does it have to
reveal how many shares outstanding it has to qualify for the Pink Sheets. The reason why a company tries to get listed on the Pink
Sheets, even though their stock will not go up in price because they have
no sales to speak of, is because it gives their company more substance and
credibility; it is typically easier to attract additional capital, obtain
financing, and execute contracts and agreements if a company is publicly
traded, even if it is on the Pink Sheets. Also, it is easier to get
transferred from the Pink Sheets to one of the larger exchanges than it is
to go from being a private company to hopping directly on to one of the
major exchanges, such as the NASDAQ or NYSE. Companies listed on the Pink
Sheets trade as ridiculously low as $0.00001 per share, all the way up to
$500 per share and sometimes beyond. Foreign companies often have some of
their shares sold in the United States by listing them on the Pink Sheets. The OTC (Over-The-Counter) Bulletin Board is similar to the
Pink Sheets. This exchange consists of relatively young companies either
with no sales or a small amount of sales. Companies listed on it are
sometimes fully reporting (meaning that they reveal how many shares they
have outstanding and what their balance sheet looks like). Often,
companies go from the Pink Sheets to the Bulletin Board once they are
ready to become fully or semi-reporting. Most publicly traded companies that are now listed on one of
the major exchanges (NASADAQ, AMEX, NYSE), at one time or another, were
penny stocks listed on the Pink Sheets or Bulletin Board. Rarely does a
company go from being private directly to one of the 3 major exchanges.
Google is a rare example of a company that was able to do that, because
they were so successful so quickly. But, most companies have to pay their
dues and edge their way up from the penny stock exchanges to the bigger
ones. So, investing in penny stocks can be an excellent investment
because some of these young companies will one day be worth a fortune. The
hard part is finding the right company to invest in, because for every
successful startup company, there is also one that fails within the first
year or two. To find the right company, there are a few things you need to
look for. Number one, you need to do some research and try to find out how
many shares the company has in its float. The float is the number of
shares that are currently being traded. Companies listed on the Pink
Sheets usually do not officially report this number to the public, but
with a little research, you can usually find out. It is usually contained
in articles written about the company, or in TV or radio interviews with
company officials that are sometimes archived on certain websites. You can
also look for the information on message boards or forums where stock
traders chat with each other. Simply do a search on Google and read every
article ever written about the company, and you will likely find out about
their float. This is important because you do not want to invest in a
company that already has something like 500 million shares in its float.
Companies with this kind of share count are likely having problems moving
forward, so they have issued more and more shares to raise money just to
stay alive. You want to look for companies that have approximately 5 to
100 million shares in their float. Other things that you should look for in a new company are
barriers to entry, patents, and consumer demand. Here are the questions
you need to ask yourself when analyzing the probability that a company
will be successful: 1) Barriers to Entry: Are there are obstacles that will make
it difficult for the company to sell its products or services? 2) Patents: Is the product that the company is going to sell
patented? A patent will prevent other companies from producing the exact
same product. 3) Consumer Demand: Will there be a demand for what the
company is selling? Sometimes a company has a great new invention or an
exciting technology, but if it is not something practical that consumers
are going to want or need, then it does not matter how great it is. I hope this information has helped you to get acquainted with penny stocks. Try to set aside some money for investing and start while you are still young. The earlier you begin, the more money you can potentially make down the road. Do your homework on the companies you are going to invest in and you will do By: Jim Pretin
|
|||
