According to the U.S. Securities and Exchange Commission (SEC), penny stocks refer to the shares of a small company that trade for less than five dollars. Most of the penny stocks are traded by Over The Counter (OTC) transactions via the electronic OTC Bulletin Board (OTCBB) or via the OTC Markets Group, which is privately owned. However, some penny stocks can also be traded on large exchanges like the New York Stock Exchange.

Why people buy penny stocks?

Quick Financing Speed

Most of the people who are eager to invest in penny stocks want to get rich quickly. Who could resist the attempt to see a few hundred dollars turning into several million within a short period  of time?

Volatility

Volatility can be either good or bad. Impatient investors may find themselves most attracted by the volatility of those penny stocks. The great potential brought by penny stocks can largely ignite investors’ passion, though they could encounter equivalent downside risks. At least, penny stocks with volatility can be educational for new investors.

Increase Investment Diversity

Sometimes investors do not have enough money to purchase multiple types of stocks, and penny stocks can allow investors to spread a small investment among different stocks. This particularly appeals to those investors with smaller portfolios.

Potential risks

Limited Public Information

Since many penny stocks are not listed on major stock exchanges, little information about them can be found compared with the shares from large, well-established companies. Even if you do find some information, chances are that it may not come from credible sources.

Lack of Liquidity

Penny stocks are difficult to sell and therefore investors with such stocks often have to lower the price until the price attracts another buyer. This can cause great loss to investors. Besides, due to lack of liquidity, the stock prices can be manipulated by certain traders.

Lack of History

As many penny stocks are newly formed, little historical information also makes it hard to predict a company’s performance and potential. You can never know that some companies with penny stocks have poor or no track record, and some can even face bankruptcy.

No Minimum Standards

Minimum standards serve as a safety protector for some investors. Usually, companies are required to meet some standards before they have their shares listed on major exchanges. The minimum standards for listing include aspects like total market value, stock price, number of shares and shareholders, etc. Penny stocks, on the other hand, do not need to fulfill such criteria when they are listed on the electronic bulletin board.

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