Penny stocks - what are they?

Ever hear of the term "Penny Stocks" and wonder what they were? You are not alone. I use to play the stock market back in the late 1990's. I have made $900 in one day and lost $900 in one day too. Many of those stocks were priced right around $10-15 a share. When they start to be priced below $2 a share is when they are in danger of becoming a penny stock. Penny stocks are stocks that are priced below a dollar. There are dangers when trading penny stocks. What are they?

The first danger is the stock can be removed from the stock market at any time by the SEC. Often this happens with stock valued at less than .50 cents but I have seen it done to stocks valued at .98 cents. There is no warning either. Just one day they are gone and you are left holding worthless stock. I have had that happen twice on me. Once was a stock that I held on to, thinking the company would rebound, but it never did. I bought the stock when it was about $6 a share and watched it dip to $2 a share then go up again to $9 a share. All that in a matter of a few weeks. I should have sold it but I thought it would go to at least $12 and planned on selling it then. To my horror, one day it dropped to just above $1 a share then the next week hovered around .88 cents. I couldn't afford to sell it then since I only held 100 shares so I waited and waited till it became worthless and pulled from the stock market.

The next danger is from the famous "pump and dump" scheme. Con artists will purchase huge lots of penny stocks then "leak" out the word that the stock is about to boom. During the "leak" or "insider info" period the stock does indeed go up. That is due to some people falling for the lie and buying stock. Once the stock is at the price the con artist wants it to be, they then dump their shares on the market and make a bundle of cash. The problem is that now the stock drops because of the huge sell off.

If you really want to make money on penny stocks, and indeed you can, you must research the company you are investing in - thoroughly. You need to know who holds the majority of the stock, if they are selling it and when did they sell it. Don't sign up for emails that promise to guide you to the best penny stocks to watch - do your own research and don't trust a rumor.