In the USA, a penny stocks are a common stock that trades for less than five dollars a share and is traded over the counter (OTC) through quotation services such as the OTC bulletin board or the Pink Sheets. Although penny stocks are said to be “thinly traded,” share volumes traded daily can be in the hundreds of millions for a sub-penny stock. Legitimate information on penny stock companies can be difficult to find and a stock can be easily manipulated. Many new investors are lured to the appeal of a penny stock due to the low price and perceived potential for rapid growth, which can appear to be occurring if the stock is being promoted.
However, severe loss can occur and many penny stocks lose all of their value in the long term. Accordingly, the SEC warns that penny stocks are high risk investments and new investors should be aware of the risks involved. These risks include limited liquidity, lack of financial reporting, and fraud.
Sudden changes in demand or supply of penny stock can lead to volatility in the stock price up or down. A lack of liquidity can also make it extremely difficult to sell a stock, particularly if there are no buyers that day. This can also make the stock extremely difficult to short. Lack of liquidity and volatility also makes penny stocks much more vulnerable to manipulation.
We all know that the problem is not the money but how to spend it. In an investor’s case, the problem is how to invest it. For the new investor, watching going through an investment newsletter can be a daunting task. Trying to figure out the difference between bonds and stocks from all the financial jargon can be a headache.