A penny stock is exactly what the name says; it is a stock that can be bought for pennies. However, with the compounding effect of inflation, what was true years ago no longer is, as some investors consider stocks that sell for a few meager dollars penny stock as well. The term penny stock investment can be somewhat misleading since investing in these stocks is a highly speculative exercise and volatility is the name of the game. More suited to day traders, penny stock investment is perfect for the well funded investor who is not afraid of losing everything in a stock at the drop of a hat.
The murky world of penny stock investment holds allure to both new investors with limited funds and seasoned investors, some of whom may have an uncanny ability to conduct research on penny stocks that is outside the realm of conventional research methods. Whereas listed companies have to err on the side of being transparent, accurate and useful information about penny stock companies can be almost nonexistent.
Nevertheless, the potential rewards of picking the correct penny stock are huge, with double and even triple digit returns not unknown, which also brings us to the subject of multi-bagger stocks, which will be discussed in more detail later.
Penny stock investment is mostly done through the Over The Counter Bulletin Board (OCTBB), or otcmarkets.com (more commonly known as Pink Sheets), which provide a platform for trading, and any available information about penny stock companies, such as contact information, press releases, share structure, or if the company reports to the SEC, company SEC filings. And do not hesitate to contact the company for additional information.
Penny stock message boards and forums, such as Motley Fool or Investors Hub, can also be useful sources of information, as well as penny stock review sites.
As the stock price is very low, be prepared to trade in large lots that can go as high as 1,000,000 share lots. Due to limited liquidity in the market, it is also imperativ to always use limit orders for trading in any company.
Researching the company management can start with the company website, and look for warning signs that the company may not look at itself that seriously. To research the product or service, analyze the industry and see how well the product or service ties into the overall picture. Furthermore, share volume and activity is absolutely crucial to the success of penny stock investment. Low volume will make buying easy, but selling and cashing out may become near impossible.
An almost unique phenomenon of penny stock investment is the multi-bagger stock, which is practically unheard of when investing in listed stocks. The term multi-bagger is attributed to famed money manager Peter Lynch, who coined the term to describe stocks that have produced returns in the triple digits or better, e.g., a stock that goes up fivefold is called a Five Bagger, a stock that flourishes by ten times is a Ten Bagger, and so on.
Although hard to believe, the multi-bagger stock actually surfaces periodically, but selecting a multi-bagger stock is more crystal ball than science. Still, some people have dedicated themselves to ferreting out these multi-bagger stocks, so it is worth looking into.
In conclusion, penny stock investment can be lucrative, but selecting a real multi-bagger stock is much more than just thrilling.
Hype is to be avoided at all costs.