Penny stock

Penny Stocks Definition

Generally, penny stocks trade at or below US$5 per share. Even though some penny stocks are shares on the New York Stock Exchange (NYSE), most are traded over the counter (OTC) and through the digital OTC Bulletin Board (OTCBB) or the privately-owned OTC Markets Group. OTC trades don’t take place on a trading floor at all. Quotations are also completed entirely by computer. 

Stocks under US$5 in the United States and £1 in the United Kingdom are included. Singapore’s penny stock market deals in pennies. These stocks were valued less than 20 cents each. 

Singapore’s penny stocks have a market value of less than US$10 million. 

If a stock was trading for less than a dollar a share in the past, it was considered a “penny stock”. Now, the SEC has expanded the term which entails stocks less than US$5. The responsibility of the Securities and Exchange Commission (SEC) is to safeguard investors while maintaining order and fairness in the securities markets. 

Penny stocks are typically from businesses with low trading volumes, indicating an absence of liquidity or available consumers in the market. Since there might be no buyers, investors may have a tough time selling the stock. And investors may struggle to get an accurate market price because of the lack of liquidity. 

Smaller firm sizes and lack of liquidity make penny stocks very speculative in the eyes of most investors. On the other hand, investors could lose a significant portion of their money or entire investments. 

Catalyst Pharmaceuticals Inc (CPRX), a Coral Gables, Florida-based biopharmaceutical business, is an example of a Nasdaq penny stock. Currently, the stock is trading at US$3.55 per share. The stock price has recently moved between US$2 to US$5. The stock ended at US$4.26 on August 10, 2020, but the following day it plunged to US$3.34, a roughly 22% decline. 

Features of Penny Stocks

To avoid losing money, a prospective investor should know the following aspects of these investments: 

1. A lack of liquidity 

The poor liquidity of penny stocks is due to many being traded over the counter. If an investor can’t sell the shares at the correct time, they may lose money. Low trade volumes are another consequence of the market’s lack of liquidity. As a result, even tiny transactions can significantly impact the stock’s price. 

2. There is a shortage of prior knowledge. 

There are many equities of relatively new companies with little historical data. Most of these businesses have no previous history of successful activities, products, assets, or income to draw on. Due to this, investment in such companies carries a high level of risk. 

3.A lack of openness

The regulatory authorities do not require penny stocks to file reports (e.g., SEC). In addition to that, professional stock analysts working for certified financial institutions do not cover these equities. As a result, prospective investors might not locate enough materials to make an educated investment selection. 

4.No need to meet any minimum standards.

To be listed on a significant exchange, penny stocks must meet specific minimal requirements, although this isn’t always the case. 

Benefits of Investing in Penny Stocks

Penny stocks, despite their tremendous volatility, offer exceptional returns. 

Investors are drawn to them because of their potential for rapid growth, making them a popular choice. 

Investing a tiny amount of money can yield enormous returns. Pennny stocks begin modestly, as their name implies. And because of this, they have the potential to become quite successful. 

Risks of Investing in Penny stocks

Price Fluctuations 

It’s not uncommon for developing companies with little financial resources to list their stock as a penny stock on the open market. As penny stocks tend to be issued by smaller companies, they are best suited for high-risk investors. 

If you’re a novice, you’ll want to avoid penny stocks because they tend to be more volatile and riskier. Penny stock investors may spend their entire investment or more if they buy on margin, meaning they borrowed money from a bank or broker. 

Investors should take extra safeguards in light of the high risk of penny stock investments. A prevent order before starting trade is essential so that if the market turns against you, you know exactly where to get out. Stop-loss orders have a price limit at which the shares will automatically be sold. 

Penny stocks can yield quick profits but are high-risk investments with limited trading volumes. 

Lack of information available 

In order to make an educated investment decision, gathering as much information as possible is critical. Corporate performance data can be hard to come by for some penny stocks. As a result, there may be inconsistencies in the data presented. 

The suffix “OB” is appended to the symbol of shares traded on the OTCBB. The SEC requires these companies to submit financial reports. Pink-sheet companies, on the other hand, are exempt from the SEC’s filing requirements. Such companies don’t face as much examination or regulation as those traded on the New York Stock Exchange (NYSE), Nasdaq (NASDAQ), and Singapore Exchange (SGX). 

How to find penny stocks?

Before making any investments in penny stocks, here are some key considerations to keep in mind: 

Choose equities in firms that are traded on the OTC markets. 

Steer clear of the stocks listed on the pink sheets. 

Steer clear of stocks that are being pumped and dumped. 

Avoid investing in penny stocks because of their low liquidity. 

Frequently Asked Questions