Investing in Penny Stocks in 2012

| March 29, 2012 | 0 Comments

The stock market is a somewhat reliable indicator of the strength or weakness of an economy. More accurately, the stock market is, by definition, the publicly traded portion of the economy. But there is sometimes a miscommunication between the price of a given stock and the value of the company it represents.

The value of a company is the ability it has to make profits and to continue to operate and grow successfully. The price of its stock is the amount investors think it has the ability to do this. Because companies listed in the stock market publish regular financial reports, and because these reports are read and analyzed by thousands of people, there is rarely a huge difference between the value of a stock and the value of its company. That is, stocks are generally fairly priced. It’s rare that a large, publically-traded company makes a sudden profit or has a sudden crash that investors could not have predicted via interpretation of its financial data.

However, the same cannot be said for small cap companies. Often these companies are just getting off the ground, and have no past history on which to base a reputation. Also, because of their small size, the volume of reporting is smaller, and less detailed. Simply put, the SEC doesn’t consider small cap companies to be significant enough on a global scale to warrant requiring extensive reports. This lack of transparency means that penny stocks are sometimes used as a vehicle to defraud unwitting investors.

But for those who do due diligence, penny stocks can be a source of incredible gains. Markets such as oil technology or healthcare are often great places to invest. Penny stocks to buy in these areas are in companies that have a solid financial plan, but are small enough that they have not yet attracted attention from big-time investors. By getting in at the ground level, you position yourself to gain when it rises.

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Category: Investing in Penny Stocks

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