Tuesday, November 16, 2010

Penny Stocks

A friend of mine has asked me to help him invest. He wants me to look at penny stocks. The outlook when investing in penny stocks is usually not very long-term. You typically enter a position looking to make a quick buck and then get out. There are several things to consider when choosing to put your money in a penny stock.

You have to make sure that your entrance/exit does not influence the stock price to drastically. To combat this you must make sure that the stock that you deem a good buy has high enough volume that you can act upon it fairly easy. If the stock is really low volume it makes it much harder to accumulate enough shares to get a good return if the stock actually goes up. You also have to be aware of the stock being delisted from the exchange. This can happen when a stock has an average below $1 for too long. If this happens your investment is not looking great because the amount of people that would potentially buy the stock from you is now greatly dropped and the volume will subsequently follow.

Penny stocks are usually more of a gamble than investing in stocks with a higher market cap. They also have the potential to give you the highest returns, this is what is so attractive about them from an investors standpoint. They also have the greatest potential to lose money. That is precisely what scares me.