A small public company may have that ordinary share that they trade at a low price. It is what is known as a penny stock. How you define a penny stock in one country will be different in another state depending on the lowest prices that the shares in that country will be traded. However, in most countries, for a stock to be termed as a penny stock, it is exchanged for less than 1 Euro.
Typically, the market cap of a penny stock is usually below $250 or $300 million. Such a penny stock a microcap stock. Most penny stocks will trade over-the-counter while others trade on big exchange platforms like the NASDAQ and the NYSE.
The Securities and Exchange Commission describes a penny stock in its way. It describes a penny stock as a share from a small public company that trades below $5. If a private company has these shares and has no active market, then such is included here. These shares are also sold over-the-counter and are so illiquid. Also, the pricing of stocks is a challenge since it is hard to obtain the estimated price.
Before you invest in a penny stock, you need to keenly study about it and be careful while investing in it. A good reason for considering it is because it is highly volatile and has low liquidity. Also, penny stocks are prone to fraudulent activities such as pump and dump techniques where the stock promoters tamper with the prices.
Penny stocks trade over-the-counter; therefore, they have low liquidity. The inferior liquidity may make you not trade the penny stock at the needed time and can also lead to low trading volumes. Therefore, you can carry out a small transaction that will produce large price swings.
Penny stocks are mostly found in small companies that have inadequate historical information. Such companies do not have accurate records of things such as the operations, assets, and revenues; hence it can be dangerous for you to invest in such a company.
You may also lack enough resources to make you invest in the small companies that deal with penny stocks. This is because such companies need not compile their reports with a regulatory body, and also other professional analysts do not cover the penny stocks.
Many other drawbacks come with the penny stock, and you need to think once again before investing in them. However, penny stocks are an excellent investment tool.