Penny Stocks as Sources of Income in the Stock Market

| April 9, 2012 | 0 Comments

Penny stocks are often misunderstood by small-time investors. Often seen as a great get-rich-quick plan, they are just as often path to getting rich poor. When investing in the stock market, there are two ultimate sources of income. That is, there are two main places from which a given investor gets his money.

The first source is the company in which he holds stock. If someone buys a share of stock and the company increases in value and profits, the share will increase as well. In this case, the source of the stock was ultimately the customers of the company. The company gains by receiving the money from the customer, the customer gains the product or service provided by the company, and the investor gains the net increase in value of the stock. This primarily happens over the long-term, as companies actually increase significantly in value.

The second source of income from the stock market is other investors. If an investor buys a stock at $50 per share, rides it to $60, and then shorts it as it slides back to $50, he makes $20 per share (minus brokerage fees and the price for shorting). But, over that time, the company that his share was in made a net profit of $0. Ultimately, the investor made his money from other investors who bought high and sold low. This primarily happens over the short-term, as investors take advantage of daily or weekly fluctuations that do not reflect an average long-term increase or decrease.

Most people who make money in penny stocks do so via the latter method. Even the stocks most touted as the best penny stocks to buy based on potential for long-term growth are highly volatile. Often, investors with inside knowledge (such as the company owner) will buy a huge percentage of a stock, forcing up demand and price, but then selling as it spikes. Other investors who buy in later lose their whole investment when the stock turns out to not be worth the hyped-up price.


Category: Penny Stock Tips

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