The day before “Black Thursday”, the start of the catastrophic 1929 stock market crash, Joseph Kennedy sold all the stock he owned. Many investors suffered enormous losses in the crash, which became one of the hallmarks of the Great Depression. Apparently, he got a stock tip from a shoeshine boy, which is what made Kennedy sell. In the 1920s, the stock market was the realm of the rich and powerful. Kennedy thought that if a shoeshine boy could own stock, something must have gone terribly wrong.
Now, plenty of “common” people own stock. Online trading has given anyone who has a computer, enough money to open an account and a reasonably good financial history the ability to invest in the market. You don’t have to have a personal broker or a disposable fortune to do it, and most analysts agree that average people trading stock is no longer a sign of impending doom. And although the market has become more accessible, but that doesn’t mean you should take online trading lightly.
A share of stock is basically a tiny piece of a corporation. Shareholders, or people who buy stock, are investing in the future of a company for as long as they own their shares. The price of a share varies according to economic conditions, the performance of the company and investors’ attitudes. The first time a company offers its stock for public sale is called an initial public offering (IPO), also known as “going public”.
When a business makes a profit, it can share that money with its stockholders by issuing a dividend. A business can also save its profit or re-invest it by making improvements to the business or hiring new people. Stocks that issue frequent dividends are income stocks. Stocks in companies that re-invest their profits are growth stocks.
Brokers buy and sell stocks through an exchange, charging a commission to do so. A broker is simply a person who is licensed to trade stocks through the exchange. A broker can be on the trading floor or can make trades by phone or electronically. An exchange is like a warehouse in which people buy and sell stocks. A person or computer must match each buy order to a sell order, and vice versa. Some exchanges work like auctions on an actual trading floor, and others match buyers to sellers electronically. Some examples of major stock exchanges are The New York Stock Exchange, which trades stocks auction-style on a trading floor, The NASDAQ, an electronic stock exchange, and The Tokyo Stock Exchange, a Japanese stock exchange.
Worldwide Stock Exchanges has a list of major exchanges. Over-the-counter (OTC) stocks are not listed on a major exchange, and you can look up information on them at the OTC Bulletin Board or PinkSheets. When you buy and sell stocks online, you’re using an online broker that largely takes the place of a human broker. You still use real money, but instead of talking to someone about investments, you decide which stocks to buy and sell, and you request your trades yourself. Some online brokerages offer advice from live brokers and broker-assisted trades as part of their service.
Some people who have began to trade stocks online have looked penny stocks. Penny stocks are shares that trade from a fraction of a penny to $5. They are riskier than average investments, but have tremendous reward potential. Indeed, some penny stocks have gone from 25 cents to $20.00, while others have become worthless.
In the past, penny stocks had a bad name because of risk and lack of information about the companies.
Nowadays, investors are quickly learning that penny stocks represent all the small companies across America that are great and have yet to grow or be discovered.
Many investors like penny stocks because they do not take a big cash outlay to get started, and you can own a piece of a good company inexpensively. The upside of penny stocks is the ability to turn a small investment into a fortune. The downside is the risk, volatility of the shares, and the lack of corporate transparency.
Even companies like Playboy, Ford, GM, and Xerox used to be penny stocks (among many others that you would recognize). While some companies have an initial public offering price at $20, for example, other corporations start a lot smaller than that. Those that do trade in penny stock territory very often increase dramatically in price over the years as their business grows. These are the shares that make regular people into millionaires, as an initial investment becomes a small fortune!
There are many reasons why a trader may get involved with penny stock. Sometimes a new investor will want to learn the basics of buying and selling shares, and low-priced investments seem to be a good place to start. An advanced trader will get involved in these speculative issues to hedge a position, or play with some risk money. Perhaps you may even have inside knowledge of the prospects and potential of a company you work at, and you would invest in their stock before the business really takes off (check legal constraints of ‘insider trading’ before you consider this.
Overall, penny stocks are fun and exciting, which is why some people get involved. Kind of like a high-stakes hobby. Based on the experiences of many people in the industry, the main reason people get involved with penny stocks is to try and get rich. Of course, any combination of factors can act together to drive people into the penny stock markets. These can be excitement /enjoyment, to make money, you have some inside or specialized knowledge that you can profit from, you have a strong belief in a concept or idea of a company that you think the stock will explode in price, you don’t want to miss the boat, while others are getting involved, or you want to increase your portfolio’s risk/reward exposure. Or maybe to learn the ropes of penny stock trading, or just of trading in general, you think you know how to pick winning stocks, a more expensive stock you held took a price dive, and now you are holding a ‘penny stock’ unintentionally, to increase your portfolio's diversity and exposure to certain sectors, or even for the purposes of hedging strategies.
The suitability of penny stocks as an investment vehicle will depend on many factors, and only you can ascertain if they are appropriate for you. Factors affecting your situation will include, but will not be limited to your risk tolerance, your financial and investment position, the aggressiveness of your trading goals, your expectations of returns, and your level of investment experience.
