Many of us have heard of people who made large gains from penny stocks.  Some of them invested their savings in this type of stocks and who in just a short time have doubled their investments.  They wouldn’t have earned as much if they didn’t venture into buying stocks and opted to keep their savings in the bank.

Hearing of the potential of earning big money from penny stocks you might consider investing your savings too with the hope of reaping large gains. Before investing your hard earned money, educate yourself on the nature of this investment and the risks involved.

What are penny stocks?

Despite the fact that they are called penny stocks they do not cost a penny each but they definitely demand a much, much lower price compared to shares in large blue chip corporations. Many penny stocks brokers are in agreement that stocks that cost anywhere from 50p to £3 per share are classified as penny stocks.  It is the cost per share that gives this type of stocks its strong appeal.  Another criterion used to define penny stocks is that these stocks are offered by companies that are relatively young and thus still have a short history of operations. Aside from this qualification, companies offering these shares have small tangible assets.


What type of companies offer penny stocks

There are different categories of penny stocks, each with their promise of profits for investors.  There are young or new issue shares, which may be a good choice if and when the company offering the stocks has great potential.  Companies that used to do very well but have suffered some setbacks and are now out to take a second chance of achieving their former high status after instituting changes offer what are called recovery shares.  Shares in companies whose value rise and fall depending on the economic situation in the country or a particular business cycle are what are known as cyclical shares.  Investing in stocks in these companies when the cycle is at its low point might mean large profits once the cycle reaches its high point.  Defensive shares on the other hand are offered by companies that do well even when the economy is in a bad state. Usually companies that offer this type of stocks are in the food and utilities industry, which consumers will still patronize even during an economic crisis since the products and services they offer are necessities. Stocks offered by Internet companies form another category of penny stocks.  Considered very volatile and offering little or no tangible assets, the price of shares in these companies rise and fall very fast.  The last category of shares is that offered by biotechnology companies. These companies develop new products that will soon be offered to the public.  If you firmly believe that the product that a certain biotechnology company is developing would surely make it big then this type of stocks might be the best penny stocks for you to buy. The price of the stocks would definitely shoot up once the product sells well.

How to invest in penny stocks

The key in getting the most from your investment is to be able to identify good penny stock picks.   It is not safe to just rely on gut feel. There are ways to find good penny stocks.  Seek the advice of people you know and trust who have a wide experience in stock trading and who are knowledgeable about stock market trends. They will be good sources of information on good penny stocks. You can also review popular stock message boards and even penny stock online newsletters that will give you updates on penny stocks that are being traded. By reviewing updates that these sources provide you will get valuable tips on great penny stocks and which penny stocks to watch. Not all of these newsletters provide expert advice on profitable stock choices though. Be diligent enough to find out which sites to trust. After making a decision on which stocks are worth investing in you are ready to buy penny stocks.

Where to buy penny stocks

Stocks are offered by companies to raise funds for their operations. Rather than borrowing money that would cost money, some corporations offer ownership to interested parties in the form of stocks.  The stocks that companies are offering to the public are traded in different stock trading institutions.  Since penny stocks are offered by small companies mostly with a history of less than three years the London Stock Exchange does not allow these stocks to be traded.  The London Stock Exchange trades only stocks of companies with three-year operating history and above and those with 25% of the companies’ shares held by the public.

If you would want to trade penny stocks it is The Alternative Investment Market (AIM) that would give you access to these stocks.  It is the market where new companies are given access to public financing.  Another option is the Off Exchange (OFEX), which is however not recommended to first time traders or new traders because it is not a regulated market.

Why invest in penny stocks

Many comments have been given on how risky penny stocks are and how penny stocks are bound not to do well in the current market. There are pieces of advice discouraging people who are neophytes in the stock market and with a small trading capital from venturing into penny stocks trading.  But despite the risks many people still would still like to trade in penny stocks.

People who trade in penny stocks do so primarily for the profits that these stocks promise.  There are those who find it fulfilling to speculate on which companies will be very profitable soon because of a product or service they offer.  They invest based on their speculation with the hope that the value of the shares they bought will increase dramatically when their speculation does become a reality.

Penny stocks just like any other investment has a certain level of risk. The best way to reduce risks is to first learn about penny stocks.  Take time out to research and carefully study basic information, trends, tips and advice before investing in them.