There are many people in the world who do not have a good experience in finance and stock trading, as well as a sufficient amount of money to invest in high-priced stocks. For these sections of people, penny stocks are sometimes extremely helpful as these are stocks that are considered to be five dollars or less and, for the most part, are available at such cheap rates that they take everyone by surprise. These are typically relatively small company stocks that want quick cash inflows and a market capitalization of less than $ 500 million. Penny stocks are also known by various names, such as micro-cap stocks or small-cap stocks, pink leaf stocks, and nano stocks. One of the main advantages of these actions is that it does not require a large amount of investment to get started.
These low-priced stocks may seem interesting and tempting to everyone, but they also suffer from certain drawbacks. These stocks are considered a very risky investment. Market and equity risks, dilution, low marketability, low visibility and volatility are some of the main drawbacks. It is very risky for an investor to buy this type of stock than other normal stocks. Also, to one’s surprise, they are not traded on major stock exchanges such as the New York Stock Exchange (NYSE) and the United States Stock Exchange (AMEX). These stocks are generally traded over the counter (OTC) or on the pink sheet. Various factors such as trading volume, financial stability, and business plans need to be analyzed against them. Investing in these stocks is considerably riskier and therefore the investor should collect complete information about them from reputable sources.
It is advisable that an investor should enlist the help of a reputed broker, the information provided in penny stock bills, etc. to select profitable penny stocks. The investor must also trade these stocks that are listed on reputable stock exchanges such as NASDAQ SmallCap and NASDAQ National. Also, an investor should refrain from investing all of his finances, especially in a single stock.
An investor before going to invest in penny stocks should consider the following points:
They do not provide clear information to the public. This is because these actions are mainly found in the pink sheets where companies are not required / authorized to provide information related to their company to the public.
They have no track record, as the companies applying to be listed are often new or close to bankruptcy.
They do not have much liquidity and in such a situation the shares may not be able to be sold.
They lack a minimum standard, that is, there is no minimum standard set for them to remain on the exchange.
As always, you should consult a certified financial advisor before investing in the stock market.