What are penny stocks?
‘Penny stocks’, as the name suggests, are the stocks traded at very low prices. The companies are usually with low liquidity levels and not listed on major stock exchanges. The price of penny stocks is below $1 per stock and they are in the category of high-risk stocks due to a smaller number of shareholders, larger volatility and lower liquidity levels. Usually, the stocks below $5 are also termed as penny stocks but actually, the price under $1 is traded on Over-the-counter (OTC) market.
Taking an example of owning 50,000 shares of penny stocks priced at $0.50, the rise of even $0.50 will double the investment in one day. It is an impossible case to buy such a volume of shares from the major stock exchange-listed stocks. This is just an example of the gains. However, there could be losses associated with the stocks in a similar way. The investment can turn out to be half or one-fourth within one day. Penny stocks are prone to manipulations and there could be sudden changes in the stock prices with the company’s changing trends. It even becomes impossible for the investor to know if the spike in pricing is manipulated or genuine. Penny stocks are highly prone to scams and unregulated by the national level stock exchange. Some companies demand the transactions on a gross basis which means that you’ll have to deliver the shares on the same day or take delivery.
The companies associated with penny stocks have low market capitalization. 5 things you need to know before making an investment in penny stocks are:
- Look at the share value, not price: Penny stocks are available at low prices and traders are tempted to buy them in stocks. For example, the price of a valued stock is $250 per share and $1000 investment would give you only 4 shares. On the other hand, penny stock rated $1 per share would give you 1000 shares in the same investment level. One should not think the number of shares they are getting but the value of these stocks should be considered.
- Upper and lower stock prices: Penny stocks have upper and lower percentage variations which are generally 5-10% in the normal cases. If a stock is turning towards double or triple the prices within a short span of time, there is a probability that it is turning towards the wrong way.
- Low liquidity levels: Some penny stocks trade at a lower volume which means that when you wish to sell the stocks and come forward, there will be no buyers. Investment in penny stocks with high volume requires liquidity and it depends on the buyers’ demand.
- Manipulated prices: The investors usually get in the trap of manipulated stock prices and this is when the brokers/promoters are benefited. If a penny stock is reaching to heights without making any announcements or company’s real money promotions, it is clear that the prices are manipulated. As an investor, hearing positive news about the company is beneficial irrespective of hitting to the top
- Don’t believe on the success stories: There are many places on which the success stories about a stock are mentioned. Many brokers make their investors fool by showing 100-400% raised stocks. If you are easily convinced by it, there could be a problem in the long run and the penny stocks could cause you trouble.