Penny stocks normally cost more than a penny but they are low priced stocks.
Depending on where you read the definition, the price ceiling can be a dollar a share or as high as five dollars a share.
These stocks normally aren't on NASDAQ or the New York Stock Exchange but trade over the counter.
There are a number of reasons for their low price and depending on the reason, they can be a potentially good buy or one where you simply throw away your money.
Of course, most penny stocks are risky but because of their low price, investors with a penchant for gambling often like to purchase them.
One of the reasons penny stocks may be so cheap is because they represent a financially troubled company.
If the stock symbol has a Q at the end of it, it means the company is in the process of bankruptcy.
These are not normally good buys since the law requires the assets of the company go topay loans before stockholders and there's normally nothing left of the company assets by the time the company pays all the loans.
It is normally a waste of money.
If the company has many assets, it may sell those assets; leaving the old stock worthless.
K-Mart did this to their stockholders when they sold all to Sears.
While the new K-Mart, under the guiding arm of Sears, made plenty of money both through business and the sale of the real estate, those holding the old stock just have worthless pieces of paper.
Another reason penny stock might be cheap is because it's a new company.
While new unproven companies are a risk, if you know the product, the management or the marketplace, you'll take a lot of risk out of the purchase of the stocks.
Every company has to start somewhere, normally at the bottom.
If you've ever heard of the Microsoft millionaires or know the story behind them, you'll understand how valuable penny stock can become.
In the early days of Bill Gate's empire, times were tough and stock was about all he had to give.
He offered bonuses with stock as an option.
The price of the stock was just pennies in the early days.
Since then, the stock not only grew in price, but it split many times, leaving those who had only a few hundred shares with several thousand.
Penny stock is risky, but it does have a place in your portfolio if you have enough assets.
Since no one knows which company will be the next Microsoft, you should only use a small percentage of your assets to purchase penny stocks.
However, in cases where the company stock is very inexpensive, you often can make a tidy profit if the price only increases a few pennies.
The potential for a huge gain is normally what entices people to purchase penny stocks.
If you are just starting to invest or have very little to invest, it's best to begin with the purchase of mutual funds rather than individual stocks.
While you won't have the big payday that can occasionally occur with penny stocks, you will increase your assets on a consistent basis by adding to the funds and because of the diversification, have more potential for growth without the risk of losing everything.
Once you have a good foundation, you can begin investing in riskier ventures, but be aware, more penny stocks never increase in value compared to the few that make it big.
The potential to lose your entire investment is great when you put it all into a penny stock.