The days of the dot-com era brought about a frenzy within the American stock market. As thousands of stocks rose in price, individual issues that were listed on the major exchanges became unaffordable. During this unique period, investors scrambled to find bargains. Many resorted to stock issues that were not listed on any major exchange. These stocks often sold for pennies on the dollar. However, much like their counterparts that had enjoyed being listed on an exchange, they rose rapidly in price. Unlisted stocks that sold for just a few cents per share, may have risen as high as $10 or $20 per share. Then came the collapse of the stock market that was driven by the fall of the dot-coms. However, the smartest investors had already taken their money and ran. This is especially true of the penny stock holder. So, an amateur investor may ask the question, “should I buy penny stocks?”
A penny stock is defined by the Securities Exchange Commission (SEC) in about 80 pages. However, in reality it is defined more simply as a stock that may or may not be listed on an exchange. Any individual stock issue that is priced below five dollars per share is considered a penny stock. Investors who purchase penny stocks must sign a disclosure. This disclosure details the fact that many penny stocks are fraught with extreme risk. The disclosure must be signed and dated by the investor prior to purchasing any penny stock issue. By signing the penny stock disclosure, the investor willfully acknowledges that he or she can lose some or all of their money that they plan to invest.
High risk investing has been considered among many to be a form of gambling. Often times penny stock issues provide little detail with regard to earnings or even the overall performance of the company whose
shares are being sold. This is especially true of unlisted issues. However, since the near crash of the stock market not long ago, many major corporations dipped below five dollars per share. Corporations such as General Motors have found their shares valued at less than companies that were a fraction of their size.
Penny stocks that are unlisted are often better known as over-the-counter stocks (OTC). They can also be referred to as Pink Sheet Stocks. Though not as popular as they once were, penny stocks that are traded over-the-counter still exist in quite large numbers. However, finding profitable penny stocks may be more difficult than finding a gold nugget in the backyard. When the American and the world economy stabilizes and begins to prosper once again, there may be hope that penny stocks will rebound and become a way to realize a profit.
The purchase of penny stocks in today’s economy is the purest form of high risk investing around. Great consideration should be taken by investors thinking of purchasing penny stocks today. This is especially true of unlisted issues. Investors have many avenues of realizing a potential profit with large company stocks that are well known and listed on major exchanges. Many of these large companies are very favorably priced and may be affordable to the average investor. Therefore, purchasing penny stocks as an amateur may not be a wise choice given the present investing environment.