How Do Penny Stocks Work?

Penny stocks work the same way as any other stock: An investor buys up shares and hopes that the company will grow, increasing the value of his equity stake in the company, and then sells his shares and makes a profit.

The main difference between penny stocks and larger stocks is that penny stocks fluctuate enormously on a daily basis. And therefore carries a greater risk than your average large stock investment, however, with the potential to make a lot more money. For example, if a stock only cost 10 cents, a 1 penny increase would push a 10% gain.

Typically, these types of stocks are sold for $5 or less, in most cases they're under a $1. Penny stocks are not found in the typical markets that most stocks in your portfolio might be, such as NASDAQ, NYSE and AMEX. Penny stocks are a great way of getting into the market at a low cost. And therefore, eliminates potential loss risks. The logic behind trading penny stocks is that they're far less expensive then their Blue Chip counter-parts.

Most penny stocks are shares of small companies that usually don't have great market penetration. More often than not these companies are new or expanding their businesses and this market is a great avenue for investors to get in on the ground floor.

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