You might, or might not have heard of the term somewhere, or perhaps you have already engaged in the trade. But the definition of penny stocks has along the years rolled with the dice as far as the stocks market is concerned. Initially, these were small stocks trading for less than $1 per share. However, the definition underwent some modification by the SEC, defining penny stocks as the stocks trading for not more than $5 per share.
But another question arises, as to why they are still referred to as such, yet they can trade for as much as more than a dollar. Well, the most significant reason here is due to the change in economic times. They are called so because they are times have changed and they are perceived or regarded the same way the stocks that traded below a dollar used to be perceived in the earlier ages. They are considered as risky investments for the aggressive risk-taking investor. Other synonymous terms include cent stocks, or penny shares, depending on where you or the trading company comes from.
What Are The Risks Exactly?
In most cases, companies involved with penny stock trades are in their growth phases with limited operational funds and resources. Some of their characteristics include very little attention from huge investors, and they often have low trading volumes. The other risk is that they fail to meet some criteria required for them to be listed in the major or national stocks exchange. Quite a number of such low market cap stocks have been linked with scams and corruption schemes, making it a big reputation issue, which not many wise investors might be willing to get into and risk their money.
Where They Trade
Another thing with the penny securities is that they are susceptible to some certain forms of manipulation and are less prevalent. This is perhaps one of the reasons you will find them trading on platforms such as the Pick Sheets or the OTCBB. They are harder to be featured on major exchanges such as the New York Stocks Exchange (NYSE) or the NASDAQ.
What to Beware Of
You might have encountered some self-proclaimed financial advisors or people giving you misleading information about these stocks. Some will use attractive punch lines such as telling you that global brands such as Microsoft have been there and done that. This is misleading information about penny stocks, which is meant to entice you for their own benefits. As a matter of fact, Microsoft has never been one. Higher chances are that it will never be one.
You might be having the zeal to make huge and fast profits and decide investing in such stocks if you have the aggressive investor guts, but it pays to take caution. Most of these trades promise high and impressive chances of making huge profits from these trades, but the probability of incurring huge, frustrating losses is also quite something you can look the other direction against.
Sourced from: Investopedia