What are Penny Stocks?
While there’s no hard-and-fast definition, penny stocks are generally considered to be any small-cap security trading for less than $5. In reality, the term is a misnomer — because a penny stock definitely doesn’t have to trade for pennies, and a large-cap company trading for under $5 doesn’t have the qualities of a penny stock, either.
Penny stocks are shares of small companies that are sold to raise capital to cover operating costs or to fund growth. The difference is that, when you invest in blue chip stocks, the companies are mature and well established in the marketplace. The potential for further growth and expansion is limited by their size, whereas micro-cap companies are so small, there is plenty of room for growth.
What are Penny Stocks able to offer as advantages over blue chip stocks?
Penny stocks are usually more volatile than average investments, but that can also increase the potential for profits. Pennies make faster moves than your run-of-the-mill dividend, buy-and-hold stock. For many investors, the appeal lies in the minimal cash outlay required to take a position — enabling you to own a piece of a high-potential firm inexpensively.
We have seen penny stocks generate gains for investors of 500%, 1,000%, 2,000% or more, and because these companies have relatively few shares outstanding compared to blue chips, these gains can often be achieved within a very short time frame.
Some industries produce more penny stocks than others. The most common are natural resources, especially junior mining companies and oil exploration firms. There are also an abundance of penny stock opportunities in biotech start-ups and high technology. Of course, that is only the tip of the iceberg — you’ll find penny stocks opportunities in countless sectors and companies once you start to carry out some research.
To conclude we would like to take you back to the question at the start of this article. What are Penny Stocks? In the end, the answer may very well be “the most profitable investments you have in your portfolio”!