So you have recently overheard someone talking about penny stocks and the gigantic gains they made in their investment and you need a bit of the action. When these stocks may seem appealing, they’re certainly not for everybody. Before jumping into purchasing for your first penny stock, it’s necessary to know what penny stocks are and how do penny stocks work.
What are Penny Stocks?
A penny stock is a riskier, more insecure sort of investment where stocks of those companies are trading at less than $5 per share. These stocks often trade on pink sheets or over-the-counter bulletin board (OTCBB) and are governed by the Securities and Exchange Commission with specific rules to follow.
Penny stocks not only have several terms, they also have multiple approved definitions. Although sometimes known as penny stocks or micro-cap stocks, the latter is frequently related to a business’s smaller market capitalization (between $50 and $300 million) while penny stocks are categorized by their own per share cost. Even though a common acceptance of a penny stock are those trading at less than $1 per share, the Securities Exchange Commission defines penny stocks as those trading under $5 per share. Penny stocks are mostly located outside the significant market exchanges, however, companies on major exchanges with lower stock prices are also occasionally called penny stocks.
How do penny stocks work?
Penny stocks basically trade just like any other stock whilst carrying added risk. With lower quantity, penny stocks trade hands less often making these investments less liquid. Penny stocks are also vulnerable to higher cost swings, each these factors make penny stocks hazardous investments.
As a result of their lower per share price and smaller market capitalization, penny stocks carry greater risk and are composed of highly speculative, unproven companies. With less coverage from big institutional investors, these stocks provide less information making it harder to make sound trading decisions. Since they aren’t required to file with the SEC, the information that’s available is often less plausible. Penny stocks can also be considered as liquid investments with less stocks of those companies trading hands daily. Less liquidity increases the odds of not finding a buyer and being forced to sell at undesirable rates. Additionally, these businesses are frequently the subjects of cost manipulators that will buy large quantities of a stock, then artificially inflate the share price through false and misleading positive statements (known as pump and dump).