A penny stock is a stock traded outside a major stock exchange, usually one that trades at a very low price per share, usually under 5 to be a penny stock, but in the past penny stocks traded at prices less than $1 per share, hence the name).
Penny stocks are generally highly speculative and are usually more volatile and risky than larger traditional stocks. Penny stocks typically lack liquidity, have low trading volumes, and can be subject to wide swings in price. They may be difficult to buy or sell, and market makers are often illiquid. Additionally, penny stock issuers are not required to file financial reports with the Securities and Exchange Commission (SEC), so accurate and current information about the penny stock may not be available to the public.
Due to their low trading volumes and illiquidity, penny stocks can experience sudden and drastic swings in price. This means that investors may find it difficult to buy or sell penny stocks, and they may experience losses even if the stock moves in their favor. Additionally, since penny stocks tend to be issued by small companies with limited public disclosure, information about these companies may be inaccurate or incomplete. This can lead to investors losing money if they buy penny stocks that are not legitimate companies or undervalued securities.
Finally, penny stocks may be subject to manipulation by unscrupulous traders. This manipulation can come in the form of pump and dump schemes, where traders buy large amounts of a penny stock to drive up the price, and then quickly offload the shares at a profit. This type of manipulation can quickly place unwary investors on the hook for significant losses.
When investing in penny stocks, it is important to understand the risks involved and to conduct extensive research before investing. Here are a few guidelines to consider when investing in penny stocks.
- Make sure you understand the potential risks and rewards before investing in penny stocks. Educate yourself about the investments and ensure you understand the financial reporting of penny stocks.
- Use reputable stockbrokers to purchase penny stocks. Your broker should be someone with experience and expertise in the market. They can help you with researching and selecting potential investments.
- Don't rely on so-called 'experts' who promise uncorroborated information about penny stocks. Seek advice from knowledgeable investors and consult with investment advisors.
- Diversify your portfolio and keep your investment risk budget low. Only invest small amounts of capital in each penny stock and use a mix of strategies, such as buy and hold as well as short-term trading, to limit your overall risk.
- Stay disciplined and have a long-term view. Understand what you are investing in and avoid over-leveraging your position.