All shares that trade for less than $5 are technically considered penny stocks. Most people think of shares at price points of less than $1 when they think of penny stocks, but the Securities and Exchange Commission, as well as most brokerage houses, use the $5 threshold.
Many trade for a few cents, some even for fractions of a penny. Stay away from these, you will almost certainly lose money trading them. Penny stocks are an affordable investment that just about anyone can make and, hopefully, turn a tidy profit on, but you have to know what you are doing before you go ahead and make that investment.
- Read the Penny Stocks Guide
- Open an account at an online broker
- Understand the risk of Penny Stocks
- Create an account at fool.com to manage your portfolio (free)
- Decide how much money you can risk in the investments
- Watch this video to learn about Penny Stocks
Penny Stock Risks
Without a doubt, the penny stock carries more risk than the average stock. The primary reason for this is the low value of the company makes the price easy to manipulate by wealthy individuals or small groups of people. A 100 billion dollar company can’t easily be manipulated by any individual person. A $50 million dollar company can have 20% of the whole company traded by thousands of different individuals or small trading groups. Surges in buying and selling activity can manipulate the value of the company on the short term causing inexperienced traders and investors to change their buying and selling activities.
Penny Stock Fraud
Another common penny stock fraud is Front Running. In this case, the news is actually true; insiders or brokers, knowing what is coming, take large positions ahead of the news becoming public. If insiders are involved, this is also referred to as insider trading, and is illegal.
When a stock has been laying dormant for a long time, insiders may attempt to increase interest with a type of penny stock fraud known as Circular Trading. Using multiple accounts, often established overseas, they will trade the same shares back and forth between their own accounts to create the appearance of activity.
(All of the content published on this website is to be used for informational purposes only and without warranty of any kind. The materials and information in this website are not, and should not be construed as an offer to buy or sell any of the securities named in these materials.)