The term “Penny Stock” refers to a category of very inexpensive stocks.
Essentially, any stock with a value of under $5.00 per share would be classified as a penny stock by current SEC definitions.
A primary characteristic of the penny stock is that it offers a potentially high return on investment for an investor.
While many investors see only the potential profit associated with penny stocks, before you start snapping up low-value shares you need the full picture about the risks and potential gains associated with this category of investment.
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Advantages and Benefits of Penny Stocks
There are plenty of stories of penny stocks that skyrocketed in value, and provided great gains for investors.
When a stock is only worth $0.75 a share, it can rocket up to $5.00 on a single announcement or product launch for the company.
For someone willing to risk a decent sized investment on shares valued at $0.75, this could potentially be a very profitable endeavor.
Word of Caution on Penny Stocks
However, penny stocks also carry an inherent risk.
Low priced shares are a hallmark of start-up and/or failing companies, both of which are inherently risky to invest in.
If a company is failing but has started to turn things around, obviously the optimal time to buy is when stock price is low.
However, there is an equally good chance that the company could fold completely, leaving your investment at a very serious risk.
Many more start-ups fail than succeed, making the penny stock category an equally volatile investment.
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