Penny stocks are an exciting investment to get into, and I am sure you have heard the stories of people making large amounts of money off them. Before jumping in, it is important to understand what penny stocks are and how they work.
The benefit to this is that you will be well informed and go into investing in the best penny stocks with a solid plan in place. This is important if you want to be successful.
So, what are penny stocks? Penny stocks are risky and are traded at less than $5 per share. Some, less than $1! They are traded on pink sheets or Over The counter Bulletin Board (OTCBB). They are also heavily regulated by the Securities and Exchange Commission with extremely specific rules to follow.
Now that you know what they are, let me explain exactly how they work. These stocks trade exactly like other stocks but carry a much higher risk. They tend to trade hands less quickly due to being lower in volume. Due to them having higher price swings, these particular stocks are considered to be dangerous investments.
These stocks are made up of small companies that do not have coverage from large investors. They also don’t have to file with the SEC, which makes them an even bigger risk. These stocks are considered as liquid investments, which mean not many shares from these companies trade hands daily. This also means that a lot of the time they do not find a buyer and are forced to sell the stock at a much lower price. These companies in particular are often subject to stock manipulators. This means people will buy a large portion of the company’s stock, inflate the share price by making false statements and then sell. This is widely known as pumping and dumping.
In summary:
- Penny stocks are risky
This is because of their low price per share, and high volatility.
- Less Liquidity
This means low share trading daily. This can cause large dips are spikes in the pricing levels of the shares listed.
- Small Market Capitalization
Known as micro-cap stocks, their market capitalization is usually in the range of $50-$300 million. The result of this being low price per share.
- Less Information
These companies are small and often do not have the financial history other major companies have. This makes it hard to trade because they don’t have a particular trend to follow.
- Volatility
Price swings happen daily, especially with penny stocks. Traders usually buy into these stocks when there is a new product release.
- Easily Manipulated
Quite easy for large amounts of stock to be purchased and inflated. All it takes is one false positive statement and the stock rises, and as soon as it does, the buyer sells. This leaves all the others floundering.
- SEC is watching
The SEC watches these companies like a hawk. The second they see a price strike too dramatically; they impose a trade halt and start an investigation. This leaves the investors with no control and open to extremely high losses.
Now that you know how penny stocks work, you can jump in and give it a try. Best of luck!
Disclaimer: This content does not necessarily represent the views of IWB.