In the United States, penny stocks refer to those that are traded over the counter and have a share value of less than five dollars each. These are common stocks. When you buy penny stocks, you are purchasing stocks that are are not traded on the major stock exchanges such as the New York Stock Exchange, NASDAQ or AMEX. Information on how to buy penny stocks online is more difficult to find, leading to some claims that prices and volatility figures can be easily manipulated.
According to the Securities and Exchange Commission, penny stocks are high risk investments. Many such stocks are highly volatile, especially if they are being widely promoted. The prices and perceived potential in the stocks are attractive to investors, especially novice investors. In actual trading, many of these stocks lose their entire value.
Some of the risks involved with buying penny stocks include lack of adequate accounting principles and practices, little liquidity, and reported cases of deliberate fraud. Accounting and record keeping practices can be due to lack of knowledge or can be an attempt to make the shares and the underlying company more attractive than they actually are. Limited liquidity means that even if the share holder recognizes that the stocks are not a good investment, selling them can be difficult because there are no buyers.
Fraud is self-explanatory, but is usually deliberate and planned. Some of the most common fraudulent schemes are the “Pump and Dump, ” the sale of “chop stocks” and selling stocks to those who have stolen credit. Sales on the Internet can be due to fraudsters preying upon the elderly and uninformed through spam e-mail, cold calls and other contacts.
There are minimal requirements for remaining in good standing with the SEC. The business must make regular filings, but not much else to be quoted on the Pink Sheets. It is up to the investor to do their own investigation. The stocks might be praised on internet forums by other investors, but beware of insiders trying to pump up the stock price in order to make a personal profit.
If you are considering whether to buy penny stocks, your best path is to do very thorough research on the company. You should only deal with companies that you can independently confirm history and legitimacy. If you deal through a broker, it should be one that you can trust. Purchase stocks in a field that is growing steadily, not necessarily in an industry that is exploding.