If you are asked what the difference is between penny stocks and regular stocks, your answer would probably be size. That is absolutely correct as the stocks that have the moniker “penny” are investments in small companies, and the other stocks are shares in larger companies. Big companies act differently than smaller ones and therefore their shares will act differently as well. A good investor will take those differences into account when he or she makes their investments.

The main difference between the penny stock and the traditional market has to do with volatility. The bigger stocks, the ones that represent larger companies, have more to lose and therefore they tend to be more cautious in their movement. Penny stocks, on the other hand, will often explode upwards and then crash downwards, sometimes in the space of a few days or even hours. It is much harder to predict what will happen and long term investments aren’t that practical with the cheaper stocks since they can go down and stay down forever.

The reason why penny stocks are so volatile is due to the lack of information that tends to surround these smaller companies. The penny market is very much a speculative game when compared to more traditional stocks in the larger stock market. Because so many of these small companies are very new, or are so small that not much is known about them, it is harder to make a clear picture about what will happen with the company’s movement. This leads to a lot more guessing and higher risks, and therefore the stocks can move very quickly in different directions.

You will find penny stocks are not particularly useful in creating an accurate picture of what a company is worth. With larger stocks, the share price is very closely tied to what the company is actually worth. Having more information available means garnering a clearer image of the successes and failures in a company’s financial situation, and this will bring the share prices either up or down, depending on the circumstances. Buying stocks of a much smaller company means you could have shares that are under or over valued, and only time will tell if it is the former or the latter.

Because penny stocks are so different from traditional ones, people are likely to gravitate to one or the other. Younger and more ambitious investors may feel more comfortable putting their money in penny stock choices, whereas older and more reserved investors will likely choose the bigger companies to invest in. There are some people who actually enjoy the unpredictability of how a penny stock can move. Regardless of your reasons, choose the type of investment that you feel most comfortable with.

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