Learning More About Penny Stocks

By Jacklyn Hughes
 
It's a classic catch-22: If you want to make money on the stock market, you first need to invest money.  But what if you don't have money lying around to invest? How are you supposed to make the money to invest in order to make money? The circle goes around and around. However, many Americans have found an answer-penny stocks.

Once considered the ugly stepsister on Wall Street, 'penny stocks' are opening up investment opportunities for many Americans who might not otherwise be able to get started investing in stocks. And some blue-chip companies that once traded at high prices saw their share prices drop below $1 during the height of the recession, effectively turning them into penny stocks - at least for a while.

What are penny stocks?

Common shares of public companies that trade for less than $1 per share are called 'penny stocks'. Because the prices are so low, it's possible for a person to invest in penny stocks even if they don't have a lot of capital to start with. This makes them an appealing investment for many average Americans.

What are the risks?

Risk is inherent in any investment, and penny stocks are no exception. In the past, lack of information hindered many investors from making informed decisions about penny stocks. Today, you can find plenty of information online about penny stocks, and financial media giants report on penny stock news and prices. By learning the basics and getting expert advice, you can tap their potential to turn cents into dollars.

How much money can you make in penny stocks?

Making money from any investment depends on several factors, including how much you initially invest and how wisely you choose where to invest. Penny stocks are appealing because they offer the opportunity to reap a potentially significant payout from a relatively low investment. For example, if you buy 1,000 shares of a penny stock trading at 25 cents per share, your starting investment would be just $250. If that company's share price rises to $20 - a very possible scenario in today's volatile market - your shares would be worth $20,000, meaning you made $19,750.

How do you get started?

Because penny stocks can be associated with an elevated level of risk, it's vital that you do research and due diligence on any company you're considering before you invest in it. As with any investing, you need to have a plan based on sound research and a good understanding of the fundamentals. The Internet can be a great source of information on penny stock trading and brokerage firms that can help you.