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What Are Penny Stocks?

What are penny stocks? Penny stocks or a type of investment product sounds very enticing, especially for a beginner investment. Penny stocks have the lure because almost everyone has heard of a story of an investor who made massive profits from penny stocks. Though they sound appealing, knowing what they are and how they work before proceeding with this investment is essential. Investors should proceed cautiously because penny stocks are riskier than most average investments in your portfolio.


What are Penny Stocks?

Penny stocks speculative into trading are riskier than other investments. These are stocks that companies trade for less than five dollars a share. They trade a bulletin board (OTCBB) or pink sheets on the counter, and they are regulated by the SEC. Even though this type of trading is coined Penny stocks, the SEC defines Penny stocks as training that goes from $1 to $5 per share.


How Penny Stocks Work

Penny Stocks are pretty much like any other stock in your portfolio; the only difference is that the market cap is below 1 billion dollars, and the daily volume is rather low. As volume is lower side, it causes the security to be less liquid du they trade less frequently than other stocks. Additionally, penny stocks are privy to higher price swings, which contributes to making penny stocks volatile investments. Many penny stocks are speculative and come from unproven companies. This adds to their risk factor. Some companies are susceptible to price manipulators that tend to purchase large quantities of these types of stocks to inflate the share price by often misleading and false statements. These statements are known as the pump and dump.


Are These Stocks Worth It?


Penny stocks can be a good product for investors who understand their risky nature. These investors often allocate money to penny stocks they are willing to lose. Penny stocks can fit into a diversified portfolio, but investors should always apply caution and an extra amount of due diligence when dealing with them. Moreover, investors need to have realistic expectations when purchasing stocks and know that the odds will be against them. There could be losses as these stocks are riskier than most.


The penny stocks carry a large amount of risk; they could work for a certain type of investor. We are financial professionals that can help you understand the risks that are involved with penny stocks. Contact us to find out more about these types of investments.

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