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What are penny stocks?

Penny stocks or junior companies are low-priced speculative issues selling at less than $1.00 per share.

Although penny stocks have the reputation as risky, fly-by-night investments, some penny stocks graduate into high-quality issues on major stock exchanges. The Canadian market in particular has a long history of financing junior companies and many of these penny resource issues have grown into blue chip companies. Before the fall of high-tech stocks, novice investors bought up fledgling penny stock companies hoping for the next hot-tech story. Today, start-up biotechnology companies and junior mining and oil and gas ventures make up a significant portion of penny stocks. As with any start-up business venture, risk is high with penny stocks investments. Finding quality companies with growth potential is more difficult than buying. If the junior company does succeed, chances are pretty good that the company will become a takeover target. More mature companies have the capital needed for development purposes, as well as greater management experience in running larger corporations. When a junior company is successful, investors can usually sell the penny stocks very easily in the market. In the event of a takeover, investors who did not sell their shares will most likely end up with stock in the senior company, as opposed to receiving cash. Penny stock investments are not for faint-of-heart, inexperienced investors. While they can reward investors with handsome returns should they develop into larger, successful companies, the risk of losing investment capital is very high. If you do invest in penny stocks, a small investment and a balanced diversified portfolio can minimize risk in a portfolio. In many cases, financial advisors will not recommend penny stock investments for their clients because of the high-risk factor. Last revised Q2 2002