What Are Penny Stocks
A penny stock is commonly defined as a share of stock that trades for less than $5 per share. Some sell for just pennies, hence the name penny stocks. They can be found on all stock exchanges. They can also be traded over the counter through the OTC Bulletin Board (OTCBB) and Pink Sheets. Following are some of the pros and cons of investing in penny stocks.
Why Penny Stocks are Risky
• High volatility and subject to large price swings. You cold lose heavily if you try to sell at the wrong time.
• Small capitalization, few owners and a small float, leaves these penny stocks open to manipulation by stock promoters, a practice called pump and dump.
• Some penny stocks have little liquidity meaning there are fewer buyers and sellers and it may be difficult to sell them. Lack of liquidity often results in wide bid verses ask spreads, meaning you may have to unload your stocks at a much reduced price.
• Since penny stocks offer new and small businesses a way to access public funding there may be is a scarcity of reliable information available.
• Many penny stock companies are not making a profit. Some may have high debt loads. Some may be headed for bankruptcy.
Why Investors Buy Penny Stocks
• Penny stocks are inexpensive
• It is an easy way to start investing with a small amount of money.
• Penny stocks provide small companies access to capital. If they become successful, they can apply to get listed on a larger exchange, thus increasing liquidity and value to the investor.
• If a penny stocks takes off, it can yield a very high rate of return on the shareholders investment.