In the U.S., penny stocks are high risk investments and new investors should be aware of the risks involved. These risks include limited liquidity, lack of financial reporting, and fraud.[5]
Since a penny stock has fewer shareholders, it is less 'liquid', meaning it will not trade as many shares per day as a larger company. Any sudden change in demand or supply of stock can lead to a lot of volatility in the stock price. This lack of liquidity can send a stock price soaring up quickly or crashing down quickly. Lack of liquidity and volatility also makes penny stocks much more vulnerable to manipulation by management, market makers, or third parties. A lack of liquidity can also make the stocks extremely difficult to sell a stock, particularly if there are no buyers that day. This can also make the stocks extremely difficult to short.
Secondly, unlike NASDAQ or the NYSE, there are only minimal listing requirements for a stock to remain on the OTCBB, namely that they make their filings with the SEC on time.[6] In fact, companies that fail to meet minimum standards on one of the major exchanges (NYSE, NASDAQ, or AMEX), and is often considered pejorative. However, the official SEC definition[1] of a penny stock is a low-priced, speculative security of a very small company, regardless of market capitalization or listing service.
In the UK markets, penny stocks, or penny shares as they are more commonly called, generally refer to risky stocks with a price of less than 1 euro.[1]
Penny stocks generally have market caps under $500M and are considered extremely speculative, particularly those that trade on low volumes over the counter. The Securities and Exchange Commission. Retrieved on 2006-06-15.
^ Investopedia (2005-09-05). The Lowdown on Penny Stocks. Investopedia. Retrieved on 2006-07-12.
^ Investopedia (2005-09-05). The Lowdown
