Penny Stocks
Penny stocks are low-priced stocks –
usually with a value of less than $5 – of small companies. These
stocks are traded on the Over-The-Counter-Bulletin-Board (OTCBB) and
the Pink Sheets. Both these trading venues do not have the same kind
of minimum requirements of exchanges such as Nasdaq or the NYSE set
by the Securities and Exchange Commission. Companies which issue penny
stocks may be new businesses or close to bankruptcy. A new issue of
stocks could be a way to inject quick capital to try to save the business.
All of these factors – low price, lack of
standards, and lack of stability – make penny stocks one of the
riskiest investments around. It is true that if a company succeeds the
payoff will be great, but the vast majority of penny stocks end in bankruptcy.
Other reasons why penny stocks are risky include...
- Lack of information about the company. Companies
listed in the Pink Sheets or the OTCBB do not have to issue financial
statements. Most companies also have little reportable history.
- Low liquidity. Penny stocks are infrequently traded,
so finding a buyer may be difficult. The price may have to lowered substantially
to interest someone in buying the stock.
- Potential fraud. Due to their unregulated nature,
penny stocks are often used by con artists who sell them through spam
email or off-shore brokers.
So penny stocks are risky but are there any benefits
to them?
Not all penny stocks are frauds or companies facing
bankruptcy. Some represent hard-working businesses that are struggling
to meet the requirements to get listed on Nasdaq or the NYSE. Investing
in these companies offers real growth potential – you have the
opportunity to get in at the ground floor and ride all the way to the
top.
The difficulty is finding which companies have this
growth potential. Getting this information requires a lot of research
and unless you are willing to take the time to personally investigate
a company, you may again be the victim of fraud. Some companies specialize
in offering 'inside information' about companies selling penny stock,
but they may simply be fronts for pushing a particular stock on unsuspecting
investors.
There are two ways to play the penny stocks –
do research or play craps. The low cost of these stocks means that you
will not lose a lot money if the company goes under, and as long as
you are prepared to lose this money penny stocks can be an interesting
and fun addition to any portfolio. It must be stressed, however, that
penny stocks should only make up a small portion of any portfolio. The
odds are that most penny stocks will end up in a total loss.
If you would like to buy penny stocks you need to
find a broker that will place an order for you. Many brokers will not
cover them because of the difficulties in tracking them, but some online
brokers specialize in penny stocks. Regulations require brokers to receive
written confirmation from the client concerning the transaction. The
broker is also required to give the client a document outlining the
risks of speculating with penny stocks.
Finally, the broker must disclose the current market
price of the stock and the amount of compensation the firm receives
for the trade. Monthly statements must be sent to the client detailing
market value of each penny stock in the account.
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