What is a Penny Share?

A penny share is a term often used to describe a share which has a low value - anything from 1p to 300p and it is often used to describe a company with a market capitalization of less than £100 million, a short operating history and often a small amount of tangible assets. It is these companies that can offer the most exciting opportunities but remember that you still need to see a good management team and a complete and comprehensive business plan.

Where are Penny Shares Traded?

All stock markets trade penny shares. We concentrate on growth stock which means that the shares have a real chance of showing a good profit. 

Why Trade Penny Shares?

You have a choice. Every High Street Bank claims to be an expert in the stock markets and they will advise you to invest in the worlds’ top 300 companies where you will receive a reasonable return and your money will be as safe as it could be when dealing in shares.

They will charge you a commission whenever you buy and whenever you sell, regardless of whether you make a profit or not. Your bank will not tell you, however, that they advised their clients to buy stock in a leading high street store in 1999 and the stock halved in value. Never mind they said, the stock will recover, and 3 years later it did. If you are willing to look beyond the obvious then penny shares offer a much greater return but with no greater a risk.

A penny share company can increase in value tenfold overnight with news of a takeover.  Most High Street Banks now have a stock broking department and they will try to dissuade their clients from investing in the US markets, IPO’s or in Penny Shares.

The Penny Shares Magazine researches the markets looking for safe and yet active investments in the penny shares sector of the markets.

Researching Penny Shares

Researching businesses yourself will help you to understand why share prices rise and fall, and this will help you to know when to buy and sell. Keep an eye on the “Penny Shares Review” in our newsletter, where we list a few companies for you to study. We do not necessarily recommend these companies, but they are all a good “case study” in various market sectors.

We also research the market. We look for businesses that offer a safe investment with good profits for the future, businesses that have a new technology, businesses that are about to be taken over, businesses that are undervalued, businesses with a strong management team and businesses that provide a detailed business plan. We will be bringing our research to you through our newsletter regular with information on these dynamic companies so that you can do your own research and form your own opinions. Don’t be bullied into buying blue chip boring stock that will go nowhere. 

Who Are the Penny Shares Investors?

Penny share investors are people who are willing to take a slightly higher risk than leaving their money in the bank at 6% per annum. Penny share investors usually have an amount of cash at their disposal that they can afford to tie up for 12 to 24 months. Good investments in penny stock can easily double year after year. If a stock looks like it will show a good return over a 24 month period, then take it. Ten-fold increases are possible with the right stocks, but you have to apply the rules. You can eliminate much of the risk by doing your homework. Less research means greater risk. There are several penny share stocks on the market today that will offer you a very good return with little or no risk.

What Do I Do Now?
If you have enjoyed reading so far, click on the button to the left of the page and subscribe to our newsletter. You can email or talk to our analysts, free of charge. Ask us to help you with your research. You can join in with our on-line forum for new investors, and you can join the many of us who enjoy and profit from buying and selling penny shares.

 

More about Penny Shares - Source: Wikipedia

Penny stock
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In the U.S., a penny stock is a common stock that trades for less than $5 a share and are traded over the counter (OTC) through quotation services such as the OTCBB or the Pink Sheets. Although a penny stock is said to be "thinly traded," share volumes traded daily can be in the hundreds of millions for a sub-penny stock. Legitimate information on penny stock companies can be difficult to find and a stock can be easily manipulated.

 

Definition
In the U.S. financial markets, the term penny stock commonly refers to any stock trading outside one of the major exchanges (NYSE, NASDAQ, or AMEX), and is often considered pejorative. However, the official SEC definition of a penny stock is a low-priced, speculative security of a very small company, regardless of market capitalization or whether it trades on a securitized exchange (like NYSE or NASDAQ) or an "over the counter" listing service, such as the OTCBB or Pink Sheets. The terms penny stock, microcap stock, small caps, and nano caps are sometimes all used interchangeably, however per the SEC definition, penny stock status is determined by share price, not market capitalization or listing service.

In the UK markets, a penny stock, or penny shares, as they are more commonly called, generally refer to a stock and shares in small cap companies, defined as being companies with a market capitalization of less than £100 million and/or a share price of less than £1 with a bid/offer spread greater than 10%... In the UK Penny Shares are covered by a standard regulatory risk warning issued by the Financial Services Authority(FSA)

In France, a penny stock generally refers to a risky stock with a price of less than 1 euro.

Penny stocks generally have market caps under $500M, trade under $5.00 per share and are considered speculative, particularly those that trade on low volumes over the counter. "

High-Risk Investments
Many new investors are lured to the appeal of a penny stock due to the low price and potential for rapid growth which may be as high as several hundred percent in a few days. Similarly, severe loss can occur and many penny stocks lose all of their value in the long term. Accordingly, the SEC warns that penny stocks are high risk investments and new investors should be aware of the risks involved. These risks include limited liquidity, lack of financial reporting, and fraud.

Since a penny stock has fewer shareholders, it is less 'liquid', meaning it will not trade as many shares per day as a larger company. Any sudden change in demand or supply of stock can lead to a lot of volatility in the stock price. This lack of liquidity can send a stock price soaring up quickly or crashing down quickly. Lack of liquidity and volatility also makes penny stocks much more vulnerable to manipulation by management, market makers, or third parties. A lack of liquidity can also make it extremely difficult to sell a stock, particularly if there are no buyers that day. This can also make the stock extremely difficult to short.

Secondly, unlike NASDAQ or the NYSE, there are only minimal listing requirements for a stock to remain on the OTCBB, namely that they make their filings with the SEC on time. In fact, companies that fail to meet minimum standards on one of the broader exchanges and are delisted often relist on the OTCBB or the Pink Sheets.

Furthermore, a stock trading on the Pink Sheets (recognizable with a .PK suffix) has little to no regulatory or listing requirements whatsoever, at least compared to major markets. There are no minimum accounting standards, change in notification of ownership of shares, and reported other material changes affecting the financial viability of a company, all of which are designed to protect shareholders.

The SEC notes most of the same about Internet message boards, where fraudsters claiming to be unbiased investors who've carefully done their due diligence may in fact be company insiders, and that a single person or a small team can create the appearance of a huge interest in a stock simply by creating a huge number of aliases, while banning the most vocal or perceptive critics of these offerings.

Penny Stock Fraud
Main article: Microcap stock fraud
The reason for all this relentless promotion of penny stocks is because of the profits to be made through illegal pump and dump schemes.

"A company's web site may feature a glowing press release about its financial health or some new product or innovation. Newsletters that purport to offer unbiased recommendations may suddenly tout the company as the latest "hot" stock. Messages in chat rooms and bulletin board postings may urge you to buy the stock quickly or to sell before the price goes down. Or you may even hear the company mentioned by a radio or TV analyst. Unwitting investors then purchase the stock in droves, creating high demand and pumping up the price. But when the fraudsters behind the scheme sell their shares at the peak and stop hyping the stock, the price plummets, and investors lose their money. Fraudsters frequently use this ploy with small, thinly traded companies because it's easier to manipulate a stock when there's little or no information available about the company."

There are all sorts of variations of the classic pump and dump, from short-and-distort to selling chop stocks — the last being a scam in which shares are acquired for pennies under Regulation S and then illegally sold to overseas or domestic retail investors. Other features of the typical penny stock scam include spam e-mails and junk faxes that tout ludicrous and fraudulent claims, crooked newsletter writers who promote a stock for a fee, message boards swarming with "buy now!!!" postings about a stock from anonymous, paid posters, fake or misleading press releases issued by the company, or boiler rooms full of cold-callers targeting naive, elderly, or foreign buyers all in attempt to drive up the share price while the insiders sell.

A more recent outbreak of penny stock fraud is far more brazen, and is based mostly overseas. Organized crime gangs in Eastern Europe and Asia will acquire a large number of shares of a moribund penny stock. Then, using passwords and logins to electronic brokerages, such as E*Trade, stolen at public computer terminals in hotels and elsewhere, they will then use the hijacked customer accounts to buy up shares, while at the same time selling their own shares, draining the customer accounts and leaving their victims holding thousands of shares of worthless penny stocks.

While not all stocks listed on the Pink Sheets or the OTCBB are fraudulent, one Business Week article estimated that chop stocks alone "make up perhaps half the 85 million-share daily volume of the OTC Bulletin Board."

Market Research; Avoiding a Scam
Education and research of any company is integral in making wise investment decisions. The SEC itself ensures that the securities markets operate in a fair and orderly manner, protecting against fraud in the sale of securities, illegal sales practices, market manipulations and more. Additionally, each state has its own securities regulator, found on the Web site of the North American Securities Administrators Association. http://www.nasaa.org

Broker investigation is just as important as researching the company itself. Associations such as the U.S. Brokers and Brokerage Firms http://www.nasd.com and Commodity Brokers http://www.nfa.futures.org, Futures Brokers and Brokerage Firms provide history on the broker or firm promoting stocks. If any complaints have been filed against the firm or broker, the information can be found here.

However, for independent research, “legitimate” information can be hard to find. It is available if you know where to look and what to look for. While financial, managerial and operational information for penny stocks listed on the OTCBB or major exchanges are readily available directly through the SEC, pink sheet listed companies are risky investments since they fall outside SEC regulatory filings, making solid information hard to find.

It is important to find a trustworthy, credible source before making any investment. While it is nearly impossible to find information on pink sheets, Web sites such as http://citronresearch.com and http://beaconequity.com provide detailed analysis of several pink sheet and small-cap companies. These sites expose the company’s operations, upcoming plans, working capital, subsidiaries and management. Additionally, MarketWatch.com and TheStreet.com focus provide valuable information as well.

Not all penny stock entities deserve the negative stigma, and these sites seek out the legit companies that may be worthwhile investments. Because of the potential for growth and cheaper buying costs, penny stocks can have substantial payoffs if chosen correctly.

 

 

Internet spam
Many Internet users have been exposed to e-mail spam promoting penny stocks. According to a study conducted at Oxford, 15% of all spam was related to penny stock fraud. According to the study, "People who respond to the "pump and dump" scam can lose 8% of their investment in two days. Conversely, the spammers who buy low-priced stock before sending the e-mails, typically see a return of between 4.9% and 6% when they sell."