Penny Stocks are generally of low value traded commonly out of major exchanges. Such stocks are available on over the counter bulletin board (OTCBB) or on pink sheets. You might be heard of some personal stories who profited by opting penny stock trading strategy. The risks for buying penny stocks are that they are very speculative investments. Some of them are well-organized and have a huge potential for future growth. Any stock traded under $5 is considered as penny stocks as per guidelines of Securities and Exchange Commission (SEC).
Shares on the OCTBB have to provide financial reports with SEC on time. This will make a possible financial analysis of listed companies on the board. There are some more factors that can make these small-cap investments a risky option.
Companies trading on the Pink Sheets aren’t required to file financial statements with the SEC. This makes a performing a comprehensive financial analysis difficult or near impossible at times. Many of these companies lack track records of consistently good performance or no past records at all. This can be due to things such as: being newly formed or to poor management that has led so to some serious financial problems.
Companies trading under pink sheets don’t have any requirement of providing financial statements with SEC. This makes financial analysis impossible and hence, these stocks lack mandatory information. Most of these companies do have any track record, so investor cannot judge the previous performance of such companies.
Buying cheap stocks from OTCBB or from pink sheet is very risky as compared to other stocks that are listed on major exchanges, because sometimes brokers are showing quotable behavior like initial public offering of penny stock could be performed by a broker who trying to earn most money from interested investor, even though that company is worthless for investing.
Penny stocks often attract new buyers because of their low price value and perception of large growth in short time. However this speculative perception sometimes pays off, these companies go out of business in no time as they don’t have the strong financial condition. Penny stocks share are usually offered by small companies or by new companies.
Penny stock trading is very risky because they have limited liquidity and only a few buyers are available in the market as compared to major stocks. These stocks lack important information for decision making because financial reporting of such companies is not mandatory in pink sheets. Researching of such companies can’t be done without adequate information. The possibility of fraudulent activities is very high in trading penny stocks due to low standards.
Game of penny stocks trading is very interested and very risky as the same time. If you succeed in getting right stock at the right time, you can make huge money out of your investment venture. If you are seriously interested in penny stocks trading, it is advisable for you to do complete research, deal with some trustworthy investor or reliable broker, who can guide you all through the way.