Pennystockresources

Penny Stock Picks
By pennystocks
Penny stocks- an introduction: If you are well aware about penny stocks and want to invest some money in penny stocks, you will be interested to know how to pick penny stocks. You will find a list of many stocks being traded at the website of pink sheets and will be interested to invest in some of the future Microsoft or Wal-Mart. This may happen only if the investor picks a right otherwise he or she may lose the amount.

Limited information for penny stocks: It is really very difficult to find information on penny stocks, as there are reliable sources with us. First of all the information provided by the company may not be the correct one and suppose if the information provided is correct, it may not be relevant.

For penny stocks we are not sure how to find information about the companies offering penny stocks. These companies have to provide a very little information to Securities and Exchange Commission (SEC) and get easily listed at pink sheets. These companies are therefore not regulated by SEC, as is the case with companies listed at NASDAQ or NYSE. Furthermore the history of the companies listed at penny stocks is not available. The companies may be bankrupt or new having no experience of business and thus can be highly risky. A new investor should therefore carry out the research about the companies before putting their hard earned money into the market.

The next restriction on penny stocks is the limited liquidity. Sometimes it is difficult to sell the stock, as you may not find the buyer for it. Having very low liquidity, you may have to sell the stock at hefty discount causing you a heavy loss. Sometimes the brokers manipulate the penny stocks in various ways and may cause you sever loss so until and unless you do not understand the basics of stock market avoid investing large amount in penny stocks.

Chances of fraud: As the companies offering penny stocks are not scrutinized or regulated by government agencies or The Securities and Exchange Commission (SEC), penny stocks are more prone to fraud. Most of the times the companies spread rumors about their financial performance and other related issues and mislead the investors. Many times these companies take the help of media such as newspapers, radio or email and hype about the penny stocks offered by them. You may get several emails (spam) from their agents as well. These companies also pay for some financial consult for recommending their penny stocks to the investors.

Picking the right penny stock: Although the market of is highly risky, there are good companies also at OTCBB and pink sheets. The actual understanding is needed to identify the good and a lot of research is needed before putting money in penny stocks.
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Penny Stock Returns
By penny stock
It is a well-known fact in finance that risk and return have a positive correlation. This means that an investment that carries greater risk will also give higher returns. The reason for this is very easy to understand and is almost intuitive. Suppose you had $10,000 to invest and two options A and B. Option A is a secure government bond that gives you 5% return, while option B is a higher risk investment in a company that will pay you only if it makes profits. Assume that this company has a history of making 5% Profits over several years and is likely to continue on the same lines. That is, you can expect to get a return of 5% in future years, but that is subject to the company making the same level of profits. Where would you invest your money? If the returns are likely to be the same and if you are a sane person, you would obviously invest in the risk free option. Now suppose, option B were to pay you not 5% but 15% consistently, you might be tempted to put your money in it. In other words, a higher return can make you to invest in a riskier venture.

Since penny stocks are higher risk alternatives compared to regular stocks, the only way they can attract investment is by holding out a promise of higher return. How would a offer a higher return? This will be done not directly by the stock or the company, but by market forces. The market price of a stock is fixed on the basis of a few factors such as its intrinsic value and the return yielded by it. The market price of a stock divided by the return it gives is known as the price-earnings ratio. For example, if $10 stocks were to be traded in the market at $20, and the company earns a net income per share of $1, the price-earnings ratio is 20. The price-earnings ratio will be higher for solid stocks that are known to be backed up by good management, have a history of consistent and good performance, and are perceived to be stable. The price-earnings ratio for stocks that are riskier, unknown and do not enjoy a positive perception will be much lower. This means that as against the example of price-earnings ratio of 20 that we assumed for a stable and well-known stock, a may have a much lower price-earnings ratio, say 3 or 4. Actual figures will depend on a number of other factors also.

Because of this, a will be priced lower for the same level of net income, and will therefore yield a higher return on the investment.
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