Penny Stock Fortunes

Penny Stocks can be an attractive investment. Many investors believe that penny stocks make for good investment due to the low prices of the stocks. They perceive that the stock prices being so low cannot go anywhere but up and that they can make fortunes from penny stocks. Occasionally, this is true, but if you are a novice investor, there is some information that you need to know before investing in penny stocks.

By definition, most investors and brokers define penny stocks that trade below 5 dollars per share. However, regulatory agencies classify penny stocks to be stocks with prices below 2 dollars per share. Generally speaking, penny stocks are any low priced security that trades on the Over the Counter Bulletin Board (OTCBB) or the Pink Sheets.

Most startup companies first get listed in the Pink Sheets exchange. To get listed on the Pink Sheets exchange there are no strict requirements. The company does not even have to have any sales or show how many outstanding shares it has.

The initial reason why companies get listed on the Pink Sheets exchange is to get credibility and not for the reason to have their stocks traded. If a company is listed in the Pink Sheets, it is a publicly traded company. A publicly traded company is easier to get capital, financing, and contracts. It is also easier to be transferred from the Pink Sheets exchange to the larger major exchanges, such as the NASDAQ or NYSE.

The Over the Counter Bulletin Board (OTCBB) is similar to the Pink Sheets exchange. The OTCBB consists of relatively new companies with no or a small amount of sales. Companies listed on the OTCBB sometimes do report how many outstanding shares they have and show their balance sheets. Once companies are ready to become fully or semi-reporting, they go from the Pink Sheets to the OTCBB.

The three major exchanges NYSE, NASADAQ, and AMEX are where most publicly traded companies are listed. Majority of these companies got started listing in the Pink Sheets or OTCBB before moving to the major exchanges. Seldom do companies go directly from being private to one of the three major exchanges.

Investing in penny stocks can be a great investment choice because some of these startup companies will one day be worth a fortune. The difficult part is finding the correct company to invest in. For every successful startup company there are those that will fail within the first few years.

Here are some tips to find the right companies. First thing to look for is to find out how many shares the company has in its float. The float is defined by the number of shares that are being traded. Companies listed on the Pink Sheets exchange are not required to report this to the public. However, with some research this information can usually be found. Sometimes it is located in articles written about the company. Another place to search is on stock message boards or forums. Doing a direct search in Google might find the information. Finding this information is very important. You do not want to invest in a company that already has too many shares in its float. Companies with too many shares in their float might face problems continuing their business. They have to issue more and more shares to raise money to stay in business. A good approximation is to look for companies that have about 5 to 100 million shares in their float.

Here are other things to look for in a startup company: barriers to entry, patents, and consumer demand. Look for barriers to entry, things that might make it hard for the company to sell its products or services. Look for patents, does the company have any patents that will prevent other companies from selling the same products. Look for consumer demand; is there a market for what the company is selling? Sometimes a company might have a great invention or product but there is no consumer demand for the product.

Investing in penny stocks can be a rewarding as long as you do your homework and get acquainted with penny stocks. Try to set aside some time for research and some money for investing in penny stocks. The earlier you start, the more money you can potentially make. Do your research and due diligence on the companies you are planning to invest in.