Penny stocks are the micro cap stocks having per share value ranging from a few cents to maximum 5 dollars. These stocks are not dealt on major stock exchange listings and hence, these are not preferred by many people. Penny stocks are also called nano stocks or micro stocks and the price of these stocks is determined by per share value and the total market capital of the company.

The companies included in penny status have the market cap lower than $500 million. The stocks are highly speculative and traded over the counter. Penny stocks are difficult to sell due to high volatility and low liquidity levels. However, the investors need to know about them in detail before making any move in penny stocks as the risk involved in these stocks is too high in comparison to the major stocks. Despite of the risks, these investments appeal people due to the low initial pricing and the possibility of earning high profits. Potential risks come along with the substantial losses in these stocks.

Penny Stock Risks

Penny stocks are quite risky and the investors should be aware of this fact. The liquidity levels are low, which add to their fraudulent chances. Penny stocks have less number of shareholders and it makes them less reliable. These stocks are very unpredictable and the prices either grow abruptly or fall off within no time. The lack of liquidity makes these stocks less likeable by people.

Pink sheets or OTCBB includes penny stocks and these contain low regulatory requirements than the listed stocks. The notification of penny stocks is less and this makes them a tool for fraud. It doesn’t mean that all penny stocks are not worthy, but most of them are highly unpredictable, which make them prone to doubt. The risks involved in penny stocks are more and they should be purchased carefully to avoid losses.