According to the regulations by the United States Securities and Exchange Commission, penny stocks are all shares that are traded below 5 dollars per share.
Because of their low trading value, penny stocks are mostly associated with small companies and are traded infrequently. Because of the low trading value, penny stocks have relatively lower numbers of willing buyers in the market.
Another defining characteristic is that most penny stocks trade via over the counter transactions whereby the trading transactions are conducted through an electronic over the counter bulletin board (OTCBB) or via privately owned pink slips.
Also, since there is no trading floor for over the Counter transactions, the quotations for penny stocks trades are all conducted electronically.
The lack of ready willing buyers makes trading in penny stocks riskier because as an investor, you may buy penny stocks but due to their price volatility, you may end up losing all your investment due to lack of willing buyers.
The volatility of penny stocks gives them a higher potential for rewards but also an equally higher potential for loss of your investment.
As a beginner, trading in penny stocks may not be advisable. They are mostly suitable for established investors who have developed significantly higher risk tolerance levels.
If you must trade in penny stocks, it is recommended that you consider taking the following particular precautions. One, determine and set your stop-loss order so that you always have a limit at which you sell your security in case the market moves in the direction opposite to what you had intended when making the initial trade.
With this understanding in mind, any trader who wishes to take up penny stocks must have and set realistic expectations with a clear understanding that this kind of stock is significantly high-risk investments.
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.
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