by A. M. Kane

Created on: September 20, 2008   Last Updated: October 08, 2008

As with any sphere of life there is always an element of uncertainty and a dimension of risk involved. The stock market of late, especially in the current climate of instabilities and volatilities, collapses of certain sectors etc, highlights the risk factor of "investing" in stocks and shares.

The lure of penny stocks has become ever popular as a cheap option to those who wish to dabble in the stock market, yet have limited funds with which to tinker with. The risk too is exacerbated with penny stocks, but the potential for a huge return on investment after investing smaller sums sometimes befogs the mind and goads it into an avenue of greed. More often than not, this leprechaun-style gold pot chasing leads to nothing at the end of the rainbow, only a drained bank balance and a cauldron of bitter experience.

Depending on whom you ask, they will give different opinions of what a penny stock is. Some people deem it to be literally pennies, but there is an accepted consensus that any stock with a value of around $5.00 or less can be labelled a penny stock.

It's often advised by professionals to steer clear from such stocks owing to the uncertainty aspect and the violent fluctuations that they are subject to. However, it is exactly these fluctuations that eager investors are keen to cash in on. Say someone buys a stock for 12c and invests $1000. It would yield them 8333.3 shares. Now say, there was a raise of 5c to 17c, then potentially the investor may want to sell, because 17c x 8333.3 is approximately $1416. Even minus broker fees and commissions, one can't argue that that isn't a bad financial haul in the short term, a truly handsome gain.

In reality however stocks easily go down in value as well as up, so the 12c stock could have gone down 5c instead to 7c, and that would have wiped a good 40% or so of the investors initially outlay. Since penny stock companies often are new start-ups, fledgling businesses, with little or no history of investment to review, the risk factor is very high. Many businesses, if they are to fail and fold, usually do so early on in their evolution. For people who speculated and invested in that stock, that means a full spectrum loss, with all the money ploughed in evaporating into a phantom haze.

It's noteworthy that penny stocks don't meet the requirements to be in the stock exchange, as the big exchanges don't want financial liability for them.

Some might claim there is an art and a science behind picking stocks, and that may indeed

• 1
• 2
• Next Page >>