Penny stocks are a great way to get into and invest in the stock market today. There are many companies offering low value shares (between less than $1 and $5) which are traditionally referred to as ‘penny stocks’ or ‘penny shares’.

How do penny stocks end up on the index?

These can end up for sale in two ways — the most likely is that a new startup company with a great idea creates a large number of low-value shares to sell on the stock market so that they can generate some revenue. This is then used to invest in research and development. In essence, the investors are buying the idea because they like it, although in many cases they are buying it because they think it is a good gamble. Either way, the arrangement works out for the up and coming company. This type of penny stocks generation is common for technology companies who may have a good idea and a patent, but limited revenue to actually develop and market it.

Sometimes, penny stocks are created when a company’s value goes down, for example after a spate of bad investments and financial mistakes that may have led to a close call with bankruptcy. Consumer confidence will be at an all time low and the company may have lost some of its bigger investors. In cases like this, they can generate a lot of virtually instant revenue by issuing a large number of penny stocks, which can then be reinvested in the company to fix any problems.

Negative perceptions of penny stocks

Penny stocks are often thought of in negative terms as well. Skeptics see their presence often as price manipulation in the stock market today. Another term used by the negative crowd for these shares is “thinly traded stocks”. Critics often take issue with the methods used by up and coming companies to generate revenue for research and development and see it as manipulation of the public. Perhaps there was a viral marketing campaign fueled by a variety of internet memes and other mysterious products, such as the famous “Gabbo” from The Simpsons. Critics accuse companies that resort to such tactics as if they were manipulating the stock market for their own profit, instead of trying to contact investors in traditional ways and sell them on the idea properly.

It has been noted above that people who purchase penny stocks often have little interest in the actual product that is being developed behind the company. They are merely purchasing these low priced stocks in massive amounts in the hope that they will go up by a few cents, at which point they can sell them again and make a tidy profit.

Critics also often describe penny stocks and the trading that goes on around them as “pyramid schemes”. Governments have responded in some jurisdictions by creating legislation about penny stocks that limits them in certain ways and this has largely been backed by the major corporations.