Global Penny Stock

By Stock Research Pro • March 20th, 2011

Anyone who is interested in global penny stock or simply “penny stock” investing should take the time to learn about the pros and cons of penny stock investing and make to understand the potential risks involved in this type of investment. While these low-priced stocks are often enticing to newer investors as they allow people to take a position on a stock without having a lot of capital, they are often viewed as one of the more risky investment strategies.

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What are Penny Stocks?

Penny stocks, which are also called “small cap” or “micro cap” stocks, are stocks that trade at relatively low prices- usually $5 or less. These are low market cap companies whose stocks trade outside of the major exchanges. Penny stocks usually have lower liquidity and greater bid-ask spreads than other stocks and are subject to fewer regulatory standards and less extensive listing requirements.

What are the Potential Advantages to Penny Stock Investing?

Because penny stocks are priced lower than other stocks, they present a lower price entry point for investors and even though they do not trade on the major exchanges, they are very easily acquired. Proponents of penny stock investing believe that these stocks offer a greater opportunity to double or triple an investment in a short period of time while providing a greater opportunity for diversification.

The Risks of Investing in Penny Stocks

Many of the Securities Exchange Commission (SEC) regulations do not apply to penny stock companies, so investors will not have access to company history information and will have a harder time making informed decisions regarding the future of the company. In addition, penny stocks are more susceptible to the following risks:

  • Market manipulation- Because these stocks are traded by just one or a small number of brokerage firms, it can be easy for the stock price to be manipulated. Unscrupulous firms might create artificial demand for the stock in order to drive up the price for a limited period of time.
  • Excessive charges- Firms that sell penny stocks often make their money by selling these stocks at undisclosed markups (often 100% or more) rather than simply charging a commission for the transaction.
  • Immediate loss of investment- The bid/ask spread associated with these stocks is often very large, meaning the investor suffers a significant paper loss at the time of purchase, one from which the investment might not recover.
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    The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.


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