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A penny stock is a type of stock which lies outside of the typical market of stocks. This is due to the fact that they exchange at a much lower rate than most stocks. Penny stocks have a fairly small capitalization and are seen as a much higher risk than others due to lack of liquidity.
Most of the time penny stocks will be traded through pink sheets and the OTC bulletin board.
The reason they are referred to as penny stocks is that they usually define stocks which sell for less than a dollar. These will typically be from small independent companies- hence the higher risk due to smaller companies having a higher risk of falling into financial struggles. You can find a penny stocks guide online which will help you establish how to trade and the best way to handle this type of stock.
There are also some exceptions to the rule of it only being small companies. Sometimes larger companies will also offer stocks at a low price to the public and if you look hard enough you may be lucky enough to bag one of these stocks while making your investments.
The main thing to remember if you are considering going into penny stocks is that you have to be prepared for the risk involved. If you are just starting out in the investment world, this may not be the best place for you to start. If you do have money to take the risk, you will, of course, be more likely for a lucrative reward from this scheme. Make sure though that before you make an investment, you have a stop-loss order so that you know exactly when to leave the market before you lose a huge chunk of money.
What are the risks?
The difficult thing to handle with penny stocks is the fact that there just aren’t that many resources out there to explain them or the process in which to invest in them. The issue with this is that many people cannot find enough information to make an informed decision on whether or not to take that risk.
The main problem with penny stocks is that they do not have to adhere to the same set of standards as other stocks In the market. Most of the time what will happen is when a company can no longer be part of the mainstream stocks, they will move here. This, of course, is a risk because that company could go under at any time.
How are they made?
A penny stock is made like any other stock. The company will go through a series of forms and make sure that they apply with the SEC for a spot on the list. Once they’ve gone through the application process, they will either go on the main list or they will make a penny stock. Just like every other stock, the public with then have the chance to buy these stocks and invest in the company.