Penny stocks are generally considered to be those stocks priced under $2 per share.  The rational for investing in penny stocks is that large numbers of shares can be purchased for even moderate sums of money.  Any increases in market price are magnified by the large number of shares owned.  If the stock recovers from its low price and rockets upward the investors' fortunes are made.

 

Example:  An investor has $3000 to spend and decides to invest in a small company with great potential.  Current price of the stock is at $1 per share.  3000 shares are purchased.   Some time later the company is awarded a lucrative military contract and the price per share eventually steadies out at $10 per share.  The investor happily sells and rakes in $30,000.  And this from only risking $3000.

 

A best case example to be sure.  However, there is a downside to penny stocks.  There is usually a very good reason why a stock is trading so low.  It may be virtually impossible to find accurate financial data on the company, trading volume is usually very low so selling the stock may be a problem once invested, and unscrupolous brokers do nearly criminal acts to inflate prices of the stock to fleece the unwary investor.

 

NEVER INVEST IN SOMETHING THAT YOU DO NOT KNOW INTIMATELY!!!!!

 

Bypass this one.  Even seasoned investors get shafted by the pennies.