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The Nature of Micro-Cap Stocks

Jan 16, 2008
Penny stocks give investors with a smaller cash flow the opportunity to experience large gains. Of course penny stocks are not just for the investor with empty pockets but usually those with tons of money dont concern themselves with micro-cap/penny stocks. This is for a couple reasons. One reason is investing too much money can move the market too much. The other is than usually dont mind slow gains.

You can rarely have a discussion about penny stocks without mentioning the risks associate with such an investment. One of the things to keep in mind when investing in penny stocks is that dont trade frequently like larger cap stocks typically do. How can this be a problem? Well, if you decide you want to do a quick buy and sell on a stock it may not be as easy as you would like. The stock goes up and then you decide to try to sell but not enough people are buying for you to get out of the stock and take your profits. Its not impossible to get out but it can be a factor if you are day trading.

So why do penny stocks have a bad reputation? One major reason is that most spam emails about buying stocks are usually about penny stocks. This of course is coincidence considering the sensitivity of penny stock to any kind of activity whatsoever. Usually these types of email campaigns are pushing stocks worth less than a dollar in hopes of causing relatively big movement in the market.

Something to keep in mind is that penny stocks are not traded in the big stock exchanges like NYSE or NASDAQ. They are instead traded in whats called the Over the Counter Market or OTC. This is important to remember because it basically means they have not reached the big leagues yet as an established and well known company. They are certainly far from being in the S&P 500 which is the other end of the stock market spectrum.

As an investor in penny stocks you must know they these stocks do not behave in any typical manner. You must be prepared to lose you whole investment though this worst case scenario does not happen often. If nothing else just be prepared to lose a significant chunk of money on a sell off. Penny stocks by nature are unpredictable and cannot be expected to perform consistently. Given enough time and experience you will of course learn the tell tell signs of a winner or loser.
About the Author
Scott Johns conducts research and analysis of stock market picks for a penny stock analysis company. To check out Penny Stock Picks for some of his company's latest picks.
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