What Influences the Price of Penny Stocks?

| April 4, 2012 | 0 Comments

The best penny stocks to buy are often not the cheapest, fastest rising or even the one with the best track record in the past. In fact sometimes the best penny stock to buy is no penny stock. Penny stocks are a different animal from regular stocks, and have the potential for great gains or great disaster. To avoid the latter, it’s important to understand fully how they work.

First of all, penny stocks are not necessarily worth one penny. They can be anything that usually trades below five dollars, but the technical term does not even refer strictly to the price of the stock, but the market capitalization. The market cap of penny stocks is very small, meaning that penny stocks are under a separate set of regulations than higher cap stocks. Under these regulations, penny stocks are not required to file the same information with the SEC as higher trading stocks. This means that information about the company behind said penny stocks might be spotty, inaccurate, rumor or simply non-existent.

The value of penny stocks is one area where this lack of information can lead to financial disaster. Although with any stock a fair price is technically anything the market will bear, with larger companies there is a real connection between the price of the stock and the productivity and success of the company. If the company makes money and begins expanding, this is reflected in reports to the SEC (which are public). Investors find out that the company is doing well, which makes shares of that company more desirable.

In contrast, the price of a penny stock often correlates to nothing in real life. For example, ENRON traded at a fraction of a penny per share for about a year after the company went bankrupt. In that case there was absolutely no reason why the shares were worth more than zero. Penny stock share prices are often influenced largely by speculation, and the principles of supply and demand – as more shares are purchased, the supply goes down, sending the price up (even though there is no legitimate reason to buy them in the first place).

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Category: Penny Stock Tips

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