Definition
Penny stocks, also known as cent stocks in some countries, are common shares of small public companies that trade at low prices per share.
Penny Stock
A Penny stock is a stock that trades at a low market capitalization and is outside the major market exchanges. These stocks have a lot of risk involved because they have little disclosure, limited following, large bid-ask spreads, small capitalization, and lack of liquidity. Despite all this, there is no single definition of penny stock. Some people might say that it trades for under $5, whereas others might consider stock trading off of the market exchanges as penny stock. Sometimes, people classify low-priced, small cap stocks as penny stocks.
How to Purchase Penny Stocks
You can purchase a penny stock with the help of a normal stockbroker even if it is not listed on the major market exchange. The payoff of penny stocks involves a lot of risk, which is why a lot of people question why they should invest in it. The answer to this is volatility. Penny stocks are extremely volatile and can change its worth within a few weeks. This is extremely risky but your profit will multiply if you find the right stock.
Risk of Investment
There is high risk involved when it comes to investing in penny stocks. The reason why the risk of investment with penny stocks is high is because of poor reporting standards and low liquidity. Liquidity is a big concern for investors in the lending market. Since penny stocks don’t have much exposure, low trade volume can have a huge effect on the share price of the stock.
It’s not easy to trade penny stocks, so if you own them once, you may have difficulty in reselling them, and you will also have difficulty in accurately pricing the stocks, which may mean that you will end up with stocks that are of no worth to you. Another concern is lack of reporting standards because companies submit their filings to the SEC, which gives scammers an upper hand. In order to overcome this problem, if a broker sells you a penny stock, they are supposed to give you a document that outlines all the risks of owning such stocks.
Further Reading
- The survival and success of Canadian penny stock IPOs – link.springer.com [PDF]
- A comparison of penny stock initial public offerings and reverse mergers as alternative mechanisms to going public – papers.ssrn.com [PDF]
- Impact of the Penny Stock Reform Act of 1990 on the initial public offering market – www.journals.uchicago.edu [PDF]
- The Survival and Success of Canadian Penny Stock IPOs – papers.ssrn.com [PDF]
- The effect of stock spam on financial markets – papers.ssrn.com [PDF]
- The impact of stock spams on volatility – www.tandfonline.com [PDF]
