Penny Stock, why it is risky for investors

Oct 25, 2016
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Earlier stocks which traded for less than a dollar per share were regarded as penny stocks. The U.S. Securities and Exchange Commission (SEC) have modified the definition now by including all shares that trade below $5. Penny stocks usually trade outside of the major market exchanges at a very low price and have low market capitalization. Typically they trade over-the-counter through pink sheets and OTC Bulletin Board (OTCBB). Highly speculative in nature, investing in these stocks is generally considered risky because of its illiquidity, large bid-ask spreads, smaller number of shareholders and limited following and disclosure. Despite several risk factors, investors buy penny stocks with a hope of getting large returns quickly. If you do it the right way then investing in penny stocks can even make your fortune. You should get to know market stock adviser and know about the risk factors before investing in these stocks.

  1. Lack of enough information:

The key behind any successful investment strategy is to acquire enough information for making right decisions. In case of micro-cap stocks, it is difficult to get reliable information. Companies who are listed on the pink sheet do not require filing with the SEC. So they are not as publicly scrutinized or regulated as the stocks on New York Stock Exchange and the NASDAQ stock market.

  1. No minimum requirements:

The penny stocks companies are not usually listed on the major stock exchanges of the United States so they do not need to fulfil the minimum standards requirements that listed stocks require. The Over-the counter Bulletin Board (OTCBB) requires firms to file timely reports with the SEC but the pink sheet companies have no requirements like this.

  1. Lack of History:

Most of the companies which own penny stocks are either newly formed or on the verge of getting bankrupt. Usually they have poor track records or no records at all. Naturally the absence of historical information makes it really difficult to determine the possible potential of such stocks.

  1. Low liquidity:

When a stock has low liquidity it becomes difficult to find a buyer to sell the stock. Sometimes you might even have to lower the prices of your stocks for getting a buyer. Often some traders apply pump and dump scheme to manipulate stock prices. In pump and dump scheme, investors buy large amount of stock, boost it up and then sell it to investors who find it attractive.

Only investors who have a high tolerance for risk should consider buying penny stocks. Usually they get to know market stock adviser to understand what precautions should be taken by them. If you are a new investor, then you should not get lured by the hype of these stocks. You can easily fall for scams. Do not get under the illusion that by investing in penny stocks you can get a very high return in a short period of time. Do remember, investing in penny stocks almost always go wrong. If you are not favoured by luck then you could lose it all.

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