In relation to your ULIP plan, one thing that you must understand is how the system operates. Among others, you must therefore be familiar with business and technical terms such as the penny stock. What is penny stock?
Penny stock is defined asa stock that trades at a relatively low price and market capitalization, usually outside of the major market exchanges. This type of stock is generally considered to be highly speculative and high risk because of their lack of liquidity, large bid-ask spreads, small capitalization and limited following and disclosure.
We do not suggest clients to accumulate small cap shares/penny stocks as they are highly speculative in nature. Hence, it is always advisable to invest in front line index stocks with good fundamentals.
Moreover, in the United States of America, a penny stock, also known as a microcap equity, refers generally to a share in a company which trades for less than $5.00.
While this is the official definition, and is used by the US Securities and Exchange Commission, generally every full service or discount broker, and the vast majority of analysts and institutional investors, there are other more loosely held criteria applied by the general public and most retail investors. In other countries the term may be used differently, without reference to US institutions.
Some of these alternative criteria include:
- A price per share being less than $1, and as low as fractions of one cent
- A market cap of less than $50 million or less than $25 million
- Trading on more obscure markets, such as the Pink Sheets
While such definitions are sometimes used by individuals and retail investors, the various and loose unconventional definitions enjoy no consensus or accuracy.
As well, there are many limitations with the alternative definitions, as they often contradict themselves. For example, there are many companies trading for only a few cents with market capitalization’s of hundreds of millions of dollars, or corporations trading on the Pink Sheets but having share prices of $50 or more.
Both negative and positive connotations surround micro caps and low-priced shares.
Speculative investors are attracted to microcap equities, because generally they:
- are more volatile
- make larger price moves in shorter time frames
- have greater upside potential on a percentage basis
- are easier to acquire with less initial investment
More conservative traders usually shy away from the smaller stocks, because:
- the underlying companies are often less secure or fundamentally sound
- many shares are too volatile, on both a price and percentage basis
- the companies generally don’t pay dividends
- they aren’t subject to the same reporting requirements as Blue Chip equities, if they are on the lower level exchanges
In conclusion, after knowing the ins and outs of stock trading, selling and buying of certain stocks and the like, you are now therefore ready to check and balance which among these stocks are actually worth investing with your hard earned money. Also remember with regard to penny stock the two sides to the investment philosophy or the old business axiom, “high risk, high reward.” God luck then to your stock market penny trading!