A penny stock trades at a relatively low price and possesses a small market capitalization. It trades outside of the other key market exchanges. It is believed to be highly speculative and risky due to the lack of large bid-ask spreads, small capitalization, liquidity, limited following and disclosure. Earlier, penny stocks were the stocks that valued less than $1 per share but the same has evolved now and includes shares valued less than $5. You need to visit https://www.personalincome.org/timothy-sykes-penny-stock-trading-newsletter-review-on-profit-ly/ for more info on penny stocks and how to begin trading.
Penny Stocks Could Be Highly Risky For Investors
Usually, penny stocks are suitable for investors who have a high tolerance for risk. These stocks have a great volatility level, which results in a high level of both risk and reward. As potential rewards are always beneficial, the risks related to the same can be prevented by taking the necessary precautions. Before you begin trading penny stock you need to keep the following in mind,
Have a predetermined stop-loss order beforehand
Know when to exit if the market isn’t as expected
Have realistic expectations
Do remember that if you do not have these aspects in mind, then you might lose your entire investment due to penny stock trading. In the worst case, you might also lose more than what you invested. If you have unrealistic expectations, then you are prone to be disappointed to a great extent.
If you wonder why penny stocks are risky, then you need to know that these are often the share prices of growing companies that has limited resources and cash. Having said that, most penny stocks are seen as high-risk investments with very low trading volumes.
Why Penny Stocks Are Vulnerable To Risks
There are a major reasons that make the penny stocks risky. These are detailed here for your understanding.
Lack of information: Before any successful investment, it is important to acquire the available information so that you can make informed decisions. However, the information related to micro-cap stocks is very difficult to acquire. The reason is that the companies that are on the pink sheets need not file with SEC (Securities and Exchange Commission). So, these companies are not scrutinized or regulated publicly.
No minimum standards: Even if these companies are available on the pink sheets, there is no minimum standard requirements that they need to maintain. When a company fails to maintain its position on the major exchanges, it moves to the smaller ones and there is no requirement such as timely filing of documents that they need to meet.
Lack of history: Many companies that are said to be micro-cap stocks are newly formed or nearing bankruptcy. Generally, such companies will have a poor or no track record. So, there is no information about the company’s history, which makes the performance of stocks difficult to predict.
Liquidity: When there is not much liquidity of the stocks, there will be two major issues. Firstly, there won’t be enough options to sell the stock. Secondly, the traders can manipulate stock prices due to low liquidity levels.