Are Penny Stocks Worth the Jingle?

In the US stock markets the definition of a penny stock is one that is trading under $5.00 per share. While $5.00 per share is hardly a pocket full of change, when compared to other high priced stocks such as Google that has its shares trade in the hundreds of dollars per share, you begin to see why $5.00 and under is considered "penny" level.

Penny stocks are a popular stock among even the most astute investors and I personally witnessed the penny stock fever when I was a stock broker in 1999 and beyond. It seems that no matter what the time period is, everyone is always looking for that next big thing. It makes sense really. What if you could find the next Microsoft when it is in its fledgling stages and trading at only a few dollars per share? When the stock hits you could strike it rich!

Unfortunately this is a scenario that plays out few times. By and large stocks will trade at a higher price because they are a better company. While there are exceptions to this rule, such as the tech bubble of the late 90s, as a general rule of thumb it is true.

Penny stocks are typically found being traded on the Over the Counter Bulletin Board (OTCBB) exchange or the Pink Sheets exchange. These exchanges are not as regulated as the big boys but penny stocks can also be found on the New York Stock Exchange, the NASDAQ, or the S&P 500. However, the larger exchanges generally have provisions that must be met by listed companies if they wish to stay listed on the exchange and usually a price tag of $5.00 or more is mandatory. To that end, penny stocks are considered to be more of an aggressive investment and carry a greater risk of loss.

The attraction is that the risk reward factor is very great. If a $5.00 stock goes down to zero then the risk is $5.00 per share, but if the stock takes off then the reward can be much, much greater. If you feel that you want to invest in penny stocks then it is a wise idea to do so with a portion of your portfolio that you and your financial advisor have allocated as aggressive. This will more often than not equal a small percentage of your portfolio and will therefore limit your risk while still allowing for the opportunity to find the next big thing and benefit from it.

Sources: Eagle Wealth Management, Eagle Wealth Management Group LLC. - Terms P, Eaglewmg.com
The Investopedia Staff, The Lowdown on Penny Stocks, Investopedia