Many newcomers to investing quickly hear about the possibly opportunities for high yield returns when other seasoned investors have chosen to buy penny stock. It may be helpful to talk about penny stocks, briefly defining them for those that are not entirely familiar with them and providing some basic points for consideration if you want to buy a penny stock yourself. Not only will the two main reasons for buying penny stocks be explained but also a piece of sound advice will be outlined in order to facilitate your own investing and trading plans.



What are penny stocks? They are basically cheap or inexpensive stocks offered by small or new start-up companies. It is not uncommon for you to find penny stocks offered for $1 or less, though sometimes as much as $5. The term "penny stock" has been used by some financial writers interchangeably with what are called "micro-cap" stocks. Of course, there is some debate on whether they are truly synonymous terms since the classification of a micro-cap stock is often based upon it relative market capitalization rate, while a penny stock is usually identified by its actual per share price. Penny stocks are also much riskier than other types of stocks since they can often loose total value if the company goes bankrupt or closes down.

Why do investors opt to buy a penny stock? What are the reasons? There are actually two basic reasons that many investors choose to buy penny stocks. The first reason involves buying shares in the hope that the companies will yield significant returns in the long-term. By purchasing a high volume of penny stock shares, the potential for the per-share price to rise dramatically does exist. If this happens, then the buyer can be expected to make a big profit because of the explosive rate of price increase. Everything over the original penny stock price is pure profit. But, is this likely to happen? That is the question that formulates the bulk of the risk associated with buying penny stocks in the first place. There is just no guarantee that the cheap stocks that you buy will ever do anything.

The second reason may be more of cost cutting method than it is anything else. The idea that some investors have when they buy penny stock is to intentionally take a loss from poorly performing penny stocks and measure that again the gains they received from high yield stocks elsewhere. It becomes a means to defray the total amount of taxes that they are likely to pay.

A final bit of advice for those who do plan to buy penny stocks: You should find a discount brokerage firm to help you buy penny stocks. Those that charge flat commission rates are preferred over those that have per-share rates. You could end up paying more money for the broker to buy the shares than the share themselves cost.

Make sure that when you buy penny stock that you consider all of the risks involved and have a strategy that maximizes the benefits you, as the investor, are likely to receive.