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Why Traders Buy Penny Stocks Despite the Risks

Posted on June 16, 2010
Filed Under Investment, Self Help | Leave a Comment

Any type of investing involves an element of risk; that fact will never change. If you buy penny stocks however, you’re taking on substantially more risk than most other investment vehicle.  Firstly however, it’s important to know exactly what penny stocks are. In the investment community, penny stocks are normally defined as any stock trading below 5.00 dollars a share. So, for example Rite Aid Corp (RAD), at $1.11  a share would technically be considered a “penny stock” though their price is still above one dollar per share. Some would argue that penny stocks are stocks that are literally pennies per share or less. Take Deep Blue Marine (DPBE) for example. At $0.0030 per share, they are not only a penny stock but a fraction of penny stock.

Most big time investors (by those I mean the investors who invest hundreds of thousands of dollars in major corporations) never even look in the direction of penny stocks. They would rather purchase stock in companies like Medco, At&t, or American Airlines.

However, Penny stocks still remain relevant in the stream of the American economy. So what’s the appeal and why are so many investors searching for the next penny stocks for dummies guide?  Well, to be blunt, penny stocks are cheap.  With only 30 dollars for example you could buy over 10000 shares in a company like Oceanic Research and Recovery (ORRV). They are a marine research and artifact finding company. If they every discover a great archaeological treasure, the stock will go up and the person who bought all those shares could reap a small fortune. If they don’t, well you only lose 30 dollars.  Of course this is an extreme example but it illustrates the point.

Lastly, because penny stocks are so inexpensive, you can have an entire portfolio of penny stocks for very little money.  If even one of them makes it big your overall return could be very sizable.  Not many (if any) blue-chips can go up 1000% in one day, but in the penny stock world this type of behavior is common place.

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