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How do Penny Stocks Work?

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Question: How Do Penny Stocks Work?

how do penny stocks workHow do penny stocks work? Penny stocks are, in most cases, the first dipping of a new company’s toe into the financial markets. They can also be the listing of a stock that has suffered a near-death experience, and is either on its last legs, or about to make a surprising comeback. 

Most major stock exchanges have certain rules, or standards, which stocks are expected to meet in order to qualify for listing. These factors can include market capitalization numbers and minimum stock prices. Many exchanges do not permit listed stocks to trade below the one dollar per share threshold for any appreciable length of time. This provides the basic rationale as to why penny stocks are called penny stocks.

How Do Penny Stocks Work Without Being Listed On A Stock Exchange? 

Not all stock exchanges have the same requirements for membership as the big, well-known ones. There are many regional stock markets which often specialize in specific industry groups such as energy or mining stocks. These regional exchanges are often home to many penny stocks until they grow large enough to move up the stock exchange food chain. Other penny stocks are traded on the OTC, or Over The Counter, desks. Wherever they are listed, penny stocks can offer incredible returns on investment. A one-cent stock that climbs to one dollar has made a 10,000 percent profit and is measured against a very insignificant amount of capital risked to buy a significant amount of shares in a company.

How do penny stocks work is a question that is answered on a technical basis with the reply that they work just like any other stock. You select one that seems to hold promise, and either make money or not. In a more general sense, penny stocks work by exposing fragile new dreams to the harsh judgment of the financial markets. Some dreamers make it big a la Microsoft, while others go down the drain like a Bernie Madoff mutual fund. These seldom-known new and struggling companies can either flicker out, or they can accelerate in growth and return huge, exponential gains to the bold trader who risked a few throwaway dollars on a flyer. In that regard, answering the question how do penny stocks work can evoke the response that they are a lot like playing the lottery because the investment is small, the chances of winning are also small, but the potential payoff is huge.

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