A penny stock commonly alludes to the stock of a small company that exchanges for under $5 per share. However some penny stocks exchange on large trades, for example, the New York Stock Exchange (NYSE), most exchange by means of over-the-counter (OTC) exchanges through the electronic OTC Bulletin Board (OTCBB) or through the exclusive OTC Markets Group. There is no trading floor for OTC exchanges. Citations are likewise completely done electronically.

Before, penny stocks were viewed as any stocks that exchanged for short of what one dollar for every offer. The U.S. Securities and Exchange Commission (SEC) has changed the definition to include all shares trading under five dollars. The SEC is an independent central government office liable for protecting investors as they maintain fair and methodical functioning of the securities markets.

Penny stocks are generally connected with small organizations and exchange infrequently meaning they have a lack of liquidity or prepared purchasers in the commercial center. Therefore, investors might find it challenging to sell stock since there may not be any purchasers around then. On account of the low liquidity, investors could experience issues finding a price that precisely mirrors the market.

Because of their lack of liquidity, wide bid-ask spreads or price statements, and small company sizes, penny stocks are by and large viewed as highly theoretical. In other words, investors could lose a sizable sum or the entirety of their investment.

Price Fluctuations of Penny Stocks

Penny stocks offered on the marketplace are often growing organizations with restricted cash and assets. Since these are essentially small organizations, penny stocks are generally appropriate for investors who have a high tolerance for risk.

Commonly, penny stocks have a higher degree of instability, resulting in a higher potential for remuneration and, hence, a higher degree of inherent risk. Investors might lose their whole investment on a penny stock, or more than their investment assuming that they purchase on margin, and that implies the investor acquired funds from a bank or dealer to buy the shares.

Considering the uplifted risk levels related with investing in penny stocks, investors ought to play it safe. For instance, an investor ought to have a stop-misfortune request predetermined prior to entering an exchange and know what price level to exit assuming the market moves inverse of the intended course. Stop-loss orders set a price limit that, once came to, will set off an automatic sell of the securities.

Despite the fact that penny stocks can have unstable gains, it is critical to have practical assumptions and understand that penny stocks are high-risk investments with low trading volumes.

What Makes Penny Stocks Risky ?

Penny stocks truly do give a good small businesses a method for accessing funding from the public. These organizations might involve this stage as a starting square to move into a larger commercial center. Additionally, since they sell at such low prices, there is space for huge potential gain. Nonetheless, a few factors worsen the risk related with investing or trading penny stocks. Securities are typically riskier than more settled organizations known as blue-chip stocks.

A blue chip is a broadly perceived, deeply grounded, and financially sound company. Blue chips by and large sell high-quality, widely acknowledged items and administrations. Blue-chip organizations regularly have a history of weathering slumps and work profitably notwithstanding unfriendly economic circumstances, which assists with contributing to their long record of steady and dependable growth.

Lack of Information Available to the Public

While considering choices for likely investments, it’s essential to have enough information to go with an informed choice. For some, penny stocks, information on corporate execution can be undeniably challenging to find. At the point when this is the situation, the information that is available about them may not come from solid sources.

Stocks exchanged on the OTCBB convey the “OB” postfix to their image. These organizations record financial explanations with the SEC. Be that as it may, organizations recorded on the pink sheets are not expected to document with the SEC. As such these businesses don’t get similar public scrutiny or guideline as the stocks addressed on the NYSE, the Nasdaq, and other business sectors.

No Minimum Standards

Stocks on the OTCBB and pink sheets don’t need to satisfy minimum standard prerequisites to remain available to be purchased through OTC trades. When a company can no longer maintain its listing position on one of the significant trades, the company can move to one of the smaller OTC listing trades. Minimum standards can go about as a security pad for certain investors. At the point when a company isn’t dependent upon higher standards, investing in that company turns out to be a lot riskier.

Lack of History

A significant number of the organizations viewed as penny stocks could be recently shaped, and some could be approaching bankruptcy. These organizations will for the most part have unfortunate histories or no history by any means. As you can imagine, this lack of historical information makes it hard to determine a stock’s true capacity.

Liquidity and Fraud

Stocks that exchange infrequently don’t have a lot of liquidity. Thus, it is conceivable that investors will not have the option to sell the stock whenever it is gained. The investors could have to bring down their price until it is thought of as appealing to another purchaser.

Low liquidity levels likewise give amazing open doors to certain merchants to control stock prices. The siphon and dump plot is a famous trading trick to bait investors into buying a stock. Large measures of a penny stock are bought trailed by a period when the stock is advertised up or siphoned up. When other investors race to purchase the stock, the con artists sell their shares. When the market acknowledges there was no fundamental justification behind the stock to rise, investors race to sell and can take on weighty misfortunes.

Pros

• Offer a spot for small organizations to gain access public funding.
• Now and again, penny stocks might give a strategy to gain admittance to larger marketplace listing.
• With a lower price, penny stocks consider huge potential gain in share appreciation.

Cons

• Penny stocks lack a liquid market with not many purchasers, maybe even after their price has increased.
• There is restricted information available on the company’s financial record.
• Penny stocks have a high likelihood of fraud and bankruptcy of the underlying company.