Risks include lack of transparency and greater probability of loss. The lowdown on penny stocks Of course, there is the potential to make money investing in penny stocks. A penny stock is loosely categorized by the Securities and Exchange Commission as one that trades for less than $5 per share and usually has a relatively small market capitalization (i. For some, penny stocks seem to have several attractive features: the ability to buy a relatively large number of shares due to the low stock price and the potential for quick gains. , pump it up ), and then, if the stock price appreciates, sell it (e how to trade penny stocks successfully. If you ve never heard of penny stocks or are considering investing in them, here are some of the key features: What are penny stocks. This means that, relative to most stocks traded on the Nasdaq or the New York Stock Exchange (NYSE), the cost of trading these stocks is typically higher. High price volatility and low liquidity are other risks how to trade penny stocks successfully. In general, penny stocks that trade on the Bulletin Board are not required to disseminate the same type or amount of information as stocks that are listed on big exchangesâlike the NYSE. Who wouldn t want to have bought in at ground-floor prices of companies long before they became big and successful.
Without enough information, you may not be able to fully evaluate the company. Low liquidity is a contributing factor to potentially high bid-ask spreads for penny stocks. Less stringent disclosure requirements can make penny stocks particularly susceptible to illegal pump-and-dump schemes where unscrupulous investors buy the stock, actively promote only its virtues (e. Venturing into the unknown More importantly, one of the biggest risks of penny stocks is the potential for a lack of reliable, readily available information. When buying or selling a stock that has low trading volume, investors may not be able to do so at their desired price or time, and that can be costly. Next steps to considerRisks include lack of transparency and greater probability of loss. You may see penny stocks referred to as micro-cap stocks at Fidelity (or as small companies elsewhere). A major risk of trading penny stocks can be their low liquidity. Unfortunately, those who bought the stock at the high end could be left high and dry. Some penny stock traders may trade tens of thousands of shares for a relatively low amount of money, hoping that the price will rise sharply over a short period of time.
, dump ) at an artificially inflated price. Many penny stocks are thinly traded, with far less than a million shares traded each day. Some investors consider penny stocks to be those that trade for less than $1 and/or over the counter on the OTC Bulletin Board.Waves.. Fidelity defines a penny stock transaction as a security traded at or below $3. Prime penny stock risks It s important to know the risks of penny stocks because of the greater potential for loss associated with these types of investments, compared with established companies that trade on larger exchanges. In practice, you might come across several definitions of a penny stock. That s the hope of many penny stock investors. Also, many penny stocks are issued by newly formed companies with little or no track record. The bottom line is this: Trading penny stocks can be extremely risky. .