How Penny Stocks Work
The dynamics of a penny stock, fundamentally, are the same as a traditional stock. They are unprotected to comparatively the same types of market forces. People buy and sell the stocks, which pushes prices up and down, and markets (investors) react to news coming from the companies by either selling, holding, or adding to their locaiongs (adding more stock to their portfolio).
Penny stocks are usually traded on the OTC market instead of NYSE, S&P 500, or the DJIA. Because of this, they typically do not get the coverage from analysts that a larger established company would. Also, because they are typically small companies, with perhaps small business, they aren’t worth as much as larger organizations.
Since these micro stocks do not have the attention from industry professionals, often times to attract investors penny stock companies will hire consulting firms to set afloat “awareness” campaigns or promotions by stock promoters. These promoters craft newsletters, mail campaigns, and websites to promote a company and its stock. They target this towards investors in the hope that some will buy stock, consequently putting money into market and company.
Because of this moment attention, price fluctuations on penny stocks often feel like riding a roller coaster. They can rise (and fall) 10%-1000% in a comparatively short time – sometimes already in the same day! This can average windfall profits or crushing losses, depending on when investors bought or sold their locaiongs.
This is one of the biggest risks investing in this kind of stocks. They may be bought cheaply – however the risk is rather large that they may lose some or all their value in a matter of hours or days. That risk isn’t as great on the major exchanges.
Unfortunately, there are also a lot of scams when it comes to penny stocks. Promoters aren’t always honest – sometimes a promoter uses spam, unsolicited mail, bothersome ads, and blatant lies in their newsletters to trick investors to put their money into a stock they are promoting. Sometimes promoters front load or buy stock cheaply, then sell the stock during the promotion when the price is climbing (known as a pump and dump). The people left holding the bill (so to speak) are the unsuspecting investors who they have duped.
nevertheless, already though all this penny stocks can be a great way to save and make money investing for both the short term and long term. However, you need to do more due diligence on any stock before investing in it.
DISCLAIMER: I am not a licensed financial adviser, investment broker or analyst. I am just an amateur trader giving his amateur objective opinion and sharing with the community what works for me. Always use prudent investing, and never invest more than you can provide to lose – in other words, be prepared to potentially lose in any case you invest.