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Penny Stocks: A Crash Course

Investing in companies usually takes place via stocks and shares, however, extremely low-cost stocks have a separate name of their own: Penny Stocks. These stocks are generally for the smaller companies with smaller market capitalization and can be highly volatile. Their price can double or sink to nothing within a short time.

Penny stock companies are generally smaller and troubled with low market capitalization

Penny stocks can have multiple definitions. For some, they are stocks priced under five dollars, and for others, they are stocks priced under one dollar. These low prices of shares can allow traders to buy a large number of stocks for a “good” and low price with the optimism that a little growth in the share price can give them large returns. These penny stock companies are generally smaller and troubled with low market capitalization. Although some can be found on NYSE and Nasdaq, most of these penny stocks are not available on major trading stock exchanges and are traded OTC.

Most stocks and shares are heavily regulated by the SEC to ensure trading is being done legally and ethically

Most stocks and shares are heavily regulated by the SEC to ensure trading is being done legally and ethically, which provides fair trading to the investors. However, the Securities and Exchange Commission, SEC, that regulates and enforces these laws against market manipulation has an exception for penny stocks. Penny stocks are usually priced much lower, even in the cents, than the established stocks. These companies, since their stock prices are under five, are not required to fill out pink sheets with the Securities and Exchange Commission, exempting them from being regulated by the SEC. Due to the lack of regulation and law enforcement, the prices can fluctuate, even drastically at times, and are more susceptible to illegal market manipulations.

Low regulations also cause trouble for the people who want to invest in penny stocks due to the lack of security of the prices and potential pumps-and-dumps in the market. Pumps-and-Dumps are illegal tactics to raise the share price by either buying a large amount or creating an interest to have others buy it, then dumping or selling the shares which ultimately leads to a downfall of the share price.

The lack of liquidity and low trading volume in penny stocks is also a key characteristic

These penny stock companies are fairly new and less covered in the media. With no long-term historical trends to predict their future, nor media coverage on the company, these stocks lead to a whole gamble with investing since false claims could be made with little verification power.

The lack of liquidity and low trading volume in penny stocks is also a key characteristic. This means that investors can potentially have a hard time finding an accurate stock price that reflects the market. If you bought a penny stock at 20 cents and the market value of that is now one dollar, you won’t be able to gain the profits if there isn’t an investor willing to pay a higher price to buy them. For well-established company stocks, where the volume is high, there would be an investor usually available willing to buy at the market price or higher.

These new company penny stocks investors can see potential wealth; however, due to the lack of information, the chances of market manipulation, and little to no regulation, penny stocks are a bit of a gamble.

For more information on penny stocks, dividend stocks and or other information on the stock market, we suggest you visit our blogs section to uncover the latest news and information to help develop your investment portfolio.

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