What are Penny Stocks?
Penny stocks may have different definitions in different countries. This is because a Penny stock is kind of a relatively low value stock among the lot. Let's look at it in much clearer sense. A Penny stock can be a stock priced lower than $1.00; this is the accepted definition is US (according to Wiki). But as I have mentioned above $1.00 could be a considerably larger amount in another country. So they may also define penny stocks as low valued stock compared to the prices of stocks in the respective country. (For example; In Sri Lanka a Penny stock is usually around Rs. 1.00 - Rs. 10.00). In UK it's below £1.
However the definition varies from country to country the ground rule is that Penny stock is a stock that is of very low price/value compared to other stocks in the market. So it's generally understandable that these stocks are heavily traded. That is penny stocks can be seen traded in large quantities simply because of the fact that penny stocks give the investor a much more higher purchasing power.
Also another feature is that these stocks are prone to constant 'manipulation'. We may often here this in the market. This is where large investors buy extremely large number of shares of penny stocks and use media to publicize it. This will lead to a sudden increase in demand for the stock leading to an unnatural rise in the price. Sometimes this rise may count up to 50% gain in one day or even less. The downturn is that this not a permanent increase. The price will fall drastically to it's original level when the big investors sell their portion with a huge gain (due to the rise in price). This is called 'Pump and Dump'. (This will be discussed further in coming articles). The plus side for the small investor is that if you're careful and observe when the big fish hunt for the stock, you can jump in too. That way you can ride the price wave and get out of it when the big fish gets out. This will need constant monitoring of the market, but it's worth a lot.
However for a day trader Penny stocks could be a gold mine. Simply because Penny stocks tend to fluctuate more than any other stock. Also the negative side is that Penny stocks usually represent small, newly established or companies that are not financially sound. So the risk is there that a Penny stock company could go bankrupt overnight and make you suffer.
So I think you have a basic idea of what penny stocks are and how they could help you in winning your Stock market game.
References : Wikipedia