Though the term “penny stock” is basically an American term that is used to denote all those stocks that are on offer for $5 or less, this term has become so popular that it is today widely used in other stock markets as well like the Australian Securities Exchange or the ASX.

Investing In Penny Stocks – What’s So Special About Them?

The penny stocks offer a special opportunity for investors and this is because of their low price obviously. Those who are particularly interested in them are the first time small investors or the retail investors – apparently their low price appeals to many of them. Blue chip stocks or stocks of renowned companies that are doing very well are often priced very high, and so there are many small investors either cannot invest in them or feel afraid to put in so much money. However with the penny stocks, the risk seems lower for 2 reasons…

• Since the price is low, the amount to be investment is also low if the same number of stocks is purchased.
• The low prices mean that they are close to the “Face Value” and thus even if the price falls, it does not do so by too much.

Investing In The Stock Market? Be Careful About The Penny Stocks

There are many investors who are often lured by the penny stocks not just because of their low prices, but also because of the fact many of them experience a rapid growth – sometimes even more than 100% in just 1 month. But you need to be very careful when you are opting for these stocks – they are extremely volatile and the climb down can be as rapid as the climb up. Do not just get lured that the price has escalated by 256% in the last 3 months – perhaps the stock is peaking out and is on verge of collapsing. In the next 2 months, it is possible that the stock may come down by 200%. So do be careful.

How To Invest In Penny Stocks?

But that does not mean that you should not be investing in them. Here is a good strategy that you can follow…

• Never just go ahead and invest. Watch the record of the stock for the last 3 months or so. See the overall trend. If there have been a few corrections but the stock still has a habit of bouncing back, and there has been overall growth, then it can be a good buy.
• If you are a really short term player then you have to go with the momentum. As soon as the selling begins, watch it for a day or two and sell it off if it persists. Do not take a chance.

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