Penny stocks generally refer to stocks that trade at low prices -- typically $5 a share or less. Although the potential benefits are high, there is also a substantial risk of losing money in penny stocks. The companies that trade at such a low price are usually small companies, and trading volume among them is generally low. Anyone wishing to trade penny stocks should investigate the companies involved carefully before investing any money.
Penny stocks are defined as individual stocks that cost less than $5 per share. In some cases the stocks may cost much less, with each share selling literally for pennies. They are not usually listed on any of the security exchanges, although such listings are allowed. Usually an over-the-counter, OTC, price is posted for penny stocks, and interested buyers and sellers can check OTC resources such as the Over-the-Counter Bulletin Board, OCBB, to find current prices.
Penny stock investors often harbor the hope that a particular stock will make money for them. It is not unusual for the value of penny stocks to double or triple in a short time, although the value may also drop to zero just as quickly.
As with other types of stocks, penny stocks are normally bought and sold through a stock broker. Because of the low trading price and high level of risk, some brokerage houses will not handle penny stocks. For most people interested in these stocks, buying and selling through an online brokerage house is the best way to go, due to the significant cost savings normally offered. Costs are minimal and there are not usually any restrictions on the purchase of penny stocks.
Because companies that issue penny stocks barely qualify to issue public stock, they are frequently on a shaky footing. Penny stock traders lose their investments so often that the Securities Exchange Commission requires a broker to provide buyers of penny stocks with a warning sheet covering the risks. This type of stock can also be hard to sell, because there are not always ready buyers.
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