Penny Stocks

Penny stocks are considered small cap stocks that entail common shares of small public companies trading for under $1 per share.

According to the US Securities and Exchange Commission (SEC), penny stocks refer to any security or financial instrument issued by small public companies which trade for under $5 a share.

Penny stocks are priced over-the-counter (OTC), rather than on the trading floor. The term is seldomly used today and derives from a period where many stocks traded for pennies on the dollar.

Penny stocks can be extremely volatile, as they are inexpensive and are bought in large quantities without expending lots of money.

This also makes them particularly susceptible to forms of abuse from stock promoters and pump and dump schemes.

Investors can fall prey to such scams whereby believing that the purchasing of large quantities of a specific penny stock will result in greater returns.

Risks of Penny Stocks

In addition, there are several inherent concerns when investing in penny stocks, all of which should represent an extra layer of caution needed when utilizing these stocks.

For example, given their low price, there is often much less information surrounding these company stocks.

As such, the lack of public information and reporting creates a market with thin liquidity that is vulnerable to stock promoters and manipulation.

It is quite common for scammers to purchase large quantities of penny stock and utilize affiliated promoters to artificially inflate the stocks share price.

This is a textbook example of a pump and dump scheme, leaving investors holding crashing stocks with literally next to nothing.