Are Penny Stocks a Good Investment?

July 4, 2011 ? 8:43 am

With all the current worry about the state of the economy, people are looking for ways to add to their income. One of the more popular investment vehicles are penny stocks. Penny stocks are company shares that trade for less than $1.00. (The Securities Exchange Commission actually defines it as any shares trading for under $5.00) Penny stocks can also be called cent stocks in some other countries.

Are penny stocks a good investment? They certainly can be, but you have to be careful in your investment choices. Since these types of stocks have such a low value and are quite often lightly traded, they can be the target of price manipulation. Companies or individuals will buy up tons of the stock at super low prices, then begin false advertising campaigns about company growth to lure the unwary investors into buying up the stock in hopes of massive profits.

Penny stock investing is like any other form of stock or index trading, education is key and you need to do your research. You wouldn?t buy a car from a stranger on the street telling you it?s a great deal, so why would you invest money in a stock on the information provided via a spam type email? When dealing with penny stocks it is usually best to do your own research. Don?t rely on ?Hot? stock lists ? these will quite often have a number of over valued stocks that will soon be taking a long walk off a short pier.

Look for stocks that fit your comfort zone, whether they be under $1.00 or OTC (Over the Counter). Once you have a company or two that you might be interested in, look them up on Google Finance, or any other service that gives free financial information. Check to see how actively traded they are, volumes over a million shares daily are a good place to start. Check their balance sheet to make sure they have money in the bank, good reserves show a company that may be able to survive through the occasional downturn in the economy. What is their profit margin ? higher is always better and a good sign that share value may increase.

Learn as much as you can about the company. Do they produce a product that is in demand, or are they in a high growth sector like alternative energy or health? What do they invest in research, how many people do they employ? Go to their website and request an investment information package if they have one available. There are many cases where investing in penny stocks will pay off big time ? remember this is an investment, not a get rich quick scheme, and you need to be prepared to spend some time and effort into securing growth for your portfolio.

So, are penny stocks a good investment? Absolutely, but like anything else, care and caution are advised. One final recommendation, if you are investing in penny stocks, make it a part of a larger portfolio, and probably do not invest more than 10% of your investment capital into the higher risk penny stocks.

About the Author

H.S. Matthews is relatively new to the Online business world, but believes that anyone can succeed with the proper motivation, tools and desire. Look here to see how he turned his trading career around. http://www.privateonlinemillionaire.com/

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