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They are not traded at the major
stock exchanges like NASDAQ or NYSE, but are listed in the pink sheets or
the OTCBB (Over The Counter Bulletin Board), because these stocks are of
companies that are unable to meet their listing requirements. They are
also referred to by other names such as pink sheet stocks, nano stocks,
small caps, micro caps or juniors.
Investing in penny stocks is considered very risky as they are traded
without any regulatory or listing requirements, which provide security to
shareholders. There are no accounting standards, and the shareholder gets
no information about the change of ownership of shares etc. This makes it
a potential source of fraud.
However, with proper research, investment in penny stocks can be a
tremendous earning potential. Not all companies listed with pink sheet
stocks should be considered fraudulent. Some of them represent good
companies, which are too small to meet the requirements of the NYSE or
NASDAQ. Many such companies have a bright future. Unlike blue chip stocks,
penny stocks have greater volatility; hence, they have the potential of
sometimes reaping rich dividends in a relatively short span of time. Thus,
investing in these startup companies at rock bottom prices can end up in
making investors very wealthy.
However, finding these companies requires research. The number of shares
that the company has on ‘float’ is one indicator that needs to be
ascertained. ‘Float’ is the technical term for the number of shares of
the company being traded. Since penny stock companies are unregulated,
they are not bound to report these details to the public. The information,
however, can be found in TV interviews, and the like, given by the
representatives of the company occasionally, and are sometimes archived on
their websites. There are forums on these websites where stock brokers
chat with each other. You can also get the information on the message
boards. Find and read the articles and reviews written about the company,
which will give you a good idea of the float. For instance, if a
company’s float were very high, it implies that it is merely issuing
extra ones to keep afloat, hence would not be worth investing in.
Companies that have five million to one hundred million shares are
considered fit for investment.
The product of the company also needs to be scrutinized. For example, it
is important to find out if the company would face obstacles in selling
its products for various reasons, or whether patent issues would allow
some other company to introduce a similar product in the market, all of
which would affect the value of the stocks. Another important
consideration would be whether the product is going to find appeal with
the target consumers.
While investing in penny stocks may be more perilous than putting your
money in bonds or the shares of established companies, the chances of
striking it rich is also a strong possibility, which makes it a risk well
worth taking.
By:
Joseph
Kenny -
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