The reason for this article is that most individuals don't know anything about these penny stocks.
They see a stock trading at $0.05, and say to themselves, "If it goes up to $1, then if I buy 10,000 shares I'm rich!" So they spend their money on it. However, they are unaware of how their purchase works.
To illustrate the different nature of penny stocks versus normal stocks, let me give you a very simple example.To prove that penny stocks are a different game than regular stocks, let's give a very simple example.
Consider a big, blue-chip firm. Let's say Apple.
More than one million of Apple stock changes hands every minute. If you wish to sell your shares, you click "sell" and BOOM! - it is gone for good. It's done. Instantly. On the other side there are so many buyers in the absolute ocean. This is referred to as Massive Volume and Liquidity in the market.
Now, let's say we have a very small penny stock. Let's suppose it is XYZ Corp. They're selling for only 2 cents a share.
There are only a few dozen people trading XYZ Corp today, and that's because it's a smallish stock. Suppose one of the guys has the sudden urge to purchase $2000 worth of XYZ, but not that many shares are sitting there at 2 cents. So, the price instantly rises to 4 cents to sell.
Congratulations, here is a 100% stock move in just five minutes. The wild swinging is called “Volatility”.
Sounds awesome, right? Now is the catch most novices get into.
Assuming you purchased those shares at 4 cents apiece what would they be worth today? After an hour, you'd like to get out and make money. You hit "sell."
But... nothing happens. Crickets.
The old guy ceased buying and no one is buying XYZ Corp now. The entire Volume has now become dry. You're essentially trapped with those shares, since nobody wants to purchase them. The next day when a buyer comes in, it may only be 1 cent that they are willing to pay. You just lost half your money and you couldn't do anything to stop it.
That's the way people go out of business.
Penny stocks can be profitable, but they are very dangerous. Before playing, one must understand the rules of the game.