What are Penny Stocks?

Mar 23, 2018 | BEGINNER, INVESTING 101

The definition of “penny stock” changes with the market. Traditionally, the term applied to stocks which sold for under $1 per share and which were only available on the over-the-counter (OTC) market.

Now, the term refers to any stock selling at under $5 per share, some of which are available on main exchanges like NASDAQ.

Penny stocks are highly speculative, highly volatile stocks suitable for those comfortable with a high-risk investment.

Companies who issue penny stocks are typically very small, very new, or are nearing bankruptcy.

Adding to the risk is the fact that penny stocks are not as regulated as blue-chips, and companies issuing this type of stock are not required to report to the Securities and Exchange Commission (SEC).

So, if they are so high-risk, why do people buy them? Simple. The chance for high-reward.

Because they are so inexpensive, penny stocks have the potential to explode. However, most don’t.

Buying penny stock can make you a lot of money very quickly, but it can also cost you your entire investment.

If you are looking into buying penny stock, be sure to do your homework.

Unlike more stable companies where the P/E ratio can be a useful tool for measuring a stock’s potential, those issuing penny stock often have little to no income. In this instance, the PEG (price-earnings-growth) ratio can be more useful. Provided the projected growth is reliable.

Ultimately it is crucial to remember that there is never any guarantee that buying stock will pay off.

And with penny stock, the risks are as exponential as the possible returns.