With the economy in a slump, and investors looking for alternatives to the mainstream stock markets, you’ve probably heard a lot of talk about something called Penny Stocks. But what is it? Probably not what you think.
Penny stocks – also commonly referred to as micro-cap stocks – aren’t by official definition stocks worth one cent per share. The U.S. Securities and Exchange Commission defines penny stocks as any publicly traded stock that is traded for $5 or less. Despite that, some traders consider penny stocks to be anything worth $3 or less and still others take a literal perspective where penny stocks are worth less than $1.
But that’s not the main thing you should know about penny stocks. While trading in penny stocks may be a financial winner for some investors, they are extremely high risk and not for everyone. Anyone planning to jump into the market should do extensive research and do their best to insure they don’t invest in a dud. Programs such as Timothy Sykes Penny Stocks guide investors toward quality stocks while helping them avoid the pitfalls of the market.
Penny stocks are considered risky for several reasons:
Micro-cap stocks typically do not carry the same amount of background information as those on the New York Stock Exchange because the SEC does not hold them to the same filing requirements.
Penny stocks are frequently related to newer companies without an extensive business history or they could be failing companies approaching bankruptcy. The lack of information allows little insight into potential performance.
Lack of liquidity in most penny stocks can make them difficult to sell. In some cases, investors can take a loss by having to sell for less than the purchase price.
One of the largest challenges with penny stocks is not getting taken by fraudulent practices. Unscrupulous tactics include the dissemination of false information regarding the stock’s performance and “pump and dump” tactics where large blocks of stock are purchased by a trader who then hypes them up. When interest peaks, the stock is sold off rapidly for a large profit.
The bottom line is penny stocks can make certain investors large profits, but it is likely to risky for most investors. Anyone interested in taking a dip in the micro-cap market should tread carefully, do extensive research and consult trustworthy sources before making any moves.
About the Author: Pearle Labonville loves writing about personal finance and investing. She thinks penny stocks are a great way for beginners to get introducted to the market without too much risk.
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