Penny stock definition

Penny stocks are stocks which have a low value. There is no specific price that a penny stock has to be for it labeled a penny stock, however in the UK Penny stocks are often shares with a value between 1p and £1. In the US penny stocks are between 1 cent and $1.

Penny stocks are popular because any increase/decrease in their value results in big profits/losses for the trader.

Example

• a trader invests $10,000 on two different shares, share A @ $40 and share B @$0.75 (penny share).
• share A has a value of $40 and gains 25 cents  (0.625% gain) 0.625% of $10,000 = a profit of $62.50
• share B (our penny stock) has a value of 75 cents and gains 25 cents. A 33.33% gain. A 33.33% gain of $10,000 = a profit of $3,333.33!

This clearly show that profits and losses are far steeper with penny stocks, which can represent an attractive investment for someone who needs quick money. However there are 3 major downsides when trading penny stocks;

• penny stocks lack liquidity and you may not be able to get out of a trade when you want to.
• there are schemes with penny stocks whereby someone (crooked Craig), informs everyone (people with little stock market education), to buy a specific penny share (which he already owns), then sells the penny stock after everyone he has informed to buy it, buys it. This means crooked Craig has made his profits whilst potentially leaving other people in a dangerously volatile trade.
• penny stocks can lose you money as fast as they can help you gain it, however this isn’t so much of a down side as this is the case with all investments.