Penny Stocks is generally referred to stocks that trade for less than a dollar. Although the profits will be small for the most part, the net earnings from dividends of these investments can really add up over a period of time.
The majority of these are not good short-term investments, though some gain value quickly. Profits from these stocks may be worth the time for some because they can multiply your investment by much more than your average stock.
For example, if you buy one hundred stocks for fifteen cents a stock, and then sell them for thirty cents a stock, you've doubled your investment. You invested fifteen dollars (100*.15) and got back thirty dollars (100*.30). Doubling your investment is always a good thing. Another upside to stock trading in penny stocks is that there is generally a smaller investment to lose than in most other stocks.
For example, if the same stocks, bought at the same price as in the paragraph above dropped to nothing, you would have only lost fifteen dollars. When people buy these kind of stocks, they are generally looking for a company that is just starting up that has a lot of potential.
Investors are always looking for a company that is expected to do well. But most of these stocks are usually stocks of new companies. Their stocks are only expected to be penny stocks because they haven't been around long enough to attract a lot of investors. Many of these stocks will quickly gain in value as people learn about them. With a good foundation, proper business tactics, and lots of promotion, stock prices can rise rapidly.
Most people who trade in these kind of stocks will sell almost as quickly as they buy. This way, when the stocks jump in price, they avoid the chance that the business will flounder by getting out quickly. These stocks are bought and sold OTC, which is short for over the counter. This simply means that buyers and sellers trade through stock brokers. The participants don't need to be present in the same area.
The securities traded in this manner are those not listed on a stock exchange. One of the most commonly known over the counter markets is the NASDAQ. These kind of stocks may seem like a waste of time to some investors because of the small amount of money that they trade at. However, some people have a lot of money invested into penny stocks. So even though one stock may seem insignificant, many can really add up. When someone has a significant amount of money invested in this type of security, it is generally in multiple companies.
This is the smart thing to do with all of your investments. Spreading out the investments spreads out the risk of loss and the chance of gain. This is true for investments other than stocks, also. These stocks are generally bought simply to sell again. Some stocks are bought in hopes of collecting a significant amount of dividends. However, these stocks aren't generally expected to. They are only bought in hopes that they will increase in value.