Penny Stocks Are High Risk, But Can Yield High Rewards

The arena of financial services there is many shades of gray, or green if you prefer. Some things have a simple and clear definition, while others defy pigeon holing. Penny stocks are one of those very concepts. Penny stocks are high risk, but can yield rewards. There is no accepted, official designation for the term "penny stocks" and which are and which are not will depend on exactly whom you ask. Each brokerage firm and financial entity will have a different set of criteria for deciding whether or not a stock is "penny stock" or not.

In the simplest of terms, penny stocks are usually determined by three factors. These factors are (1) the price per share, (2) the market that the stock trades upon and (3) the market capitalization of the company from which the stock derives. Of course, there are some variations on each of these factors, and some brokerage firms will treat all stock from companies under a certain market cap as penny stock.

The Securities Exchange Commission will consider all stocks with a price per share of less than five dollars a penny stock; brokerage firms may be far more lenient. Having one factor to qualify as a penny stock will not necessarily give a stock that determination, most have at least two and many qualify under all three.

Penny stocks are high risk, but can yield high rewards if you carefully research these investments. Make sure that you understand that it is easy to lose all of the money you have invested, but it is equally easy to make fast money with some smart planning and a lot of good fortune. Some brokers will not deal with penny stocks because they can be considered volatile and wildly unpredictable. They are usually unable or unwilling to do the necessary background research for these un-proven, small company-based stocks, and in many cases may consider them beneath them.

A small market cap usually relates to a small business, which unfortunately in this economic crisis period has a higher rate of total business failure. Although probably not a good idea for the beginning trader, or those with already tight budgets, penny stocks can be profitable in the right hands. Because they are usually from smaller and largely unproven companies, they can be purchased at bargain prices. If the company does suddenly have a growth surge, not only have you gotten in under the huge price increase, you have just made a large profit.