Penny stocks are basically substandard stocks which are not traded onto the major stock exchanges like DOW Jones or NASDAQ. These are traded on pink sheets OTC (Over The Counter) Exchanges. The stocks trading below $5 per share are categorized as penny stocks and are more risky to trade than shares of big companies.
These penny stocks chosen correctly can turn out to be a gem in future for an investor. We have seen many established and big companies shares like Microsoft, INTEL and Wal-Mart were once a penny stock in their history, but ultimately these penny stocks are a big failure. Remember, only one or two penny stocks on an average out of 200 shares result into a blue chip.click here to read more information on how to invest in penny stocks.
Here are certain factors accountable for the failure of these penny stocks and that can also be the reason why the investors fear trading into these stocks. These can be;
- Not present on major stock exchanges: Penny stocks don’t exist on the major stock exchanges. The established exchanges have certain guidelines like market capitalization, trading volumes etc, which are required for any company to get their stock listed onto these exchanges. Many penny stocks don’t meet these guidelines and are traded on OTC.
- Lack of Information: Another reason that investors often lose their money while investing into penny stocks is failure to get any reliable historic or current information about the companies unlike in case of established companies where it is easy to get the same on websites, news channels and even free analysts’ reports. The lack of information about penny stock adds to the risk of investing in penny stocks.
- Manipulations: These penny stocks are often easily manipulated. The illiquid nature of penny stocks makes it simple for operators to manipulate the pricing and even a single entity can influence their stock price movement.