Penny stocks are the company’s stock that are priced at $5 or $6 less a share. some companies with penny stocks trade on main exchanges like the NYSE or NASDAQ. These stocks mostly trade at a low price, have a small market capitalization, are mostly illiquid. These are typically are on a smaller exchange.
Most of the penny stocks are not trading on the exchanges. These stocks trade on the over-the-counter market via the electronic OTC Bulletin. These bulletins are well known as the Pink Sheets. Because these stocks are not monitored by the governing agencies by exchange rules, many brokers do not allow over-the-counter type trades.
Risks With The Penny Stocks
- On the OTC market, there are shell companies and fake companies, which increases the risk of fraud. Through newsletter services, these stocks are simple to manipulate.
- Because of their low trading volume, these stocks are easier to target for pump and dump schemes.
- Their price action has little to do with their chart’s technical analysis or the underlying company’s fundamental analysis.
- Stocks with low trading volume can have wide bid/ask spreads and bad fills both entering and exiting, which can be a concern.
- Finding shares to borrow to sell short on penny stocks is difficult, but not impossible, and it takes away half of the trading opportunities in most cases.
- These major exchange-traded stocks may be delisted.
- They may be on the verge of bankruptcy and In the future, these stocks may be set to zero.
- The best companies in the world with the best future growth potential aren’t penny stocks.
- It could take a long time to fill an OTC penny stock while waiting for another buyer or seller to come along.
- These stocks have a regulatory issue.
Before purchasing these stocks, we should exercise extreme caution. We should examine company data before attempting to invest in stocks.