“Penny Stocks” Definition:
The definition of penny stocks can be rather ambiguous. Some sources will tell you they include stocks under $5, some will say stocks under $2, and others will tell you under $1. No matter what the definition, penny stocks boil down to one common denominator – they’re highly speculative. Many of them trade on pink sheets or over-the-counter bulletin board (OTCBB) where there are no minimum performance standards, making them inherently riskier than stocks trading on major exchanges (NYSE, NASDAQ, etc.).
In addition to having no minimum standards, there are some other disadvantages to penny stocks: lack of publicly available information, nonexistent or unknown track records, and alarmingly low liquidity. Without the ability to research, it’s difficult to make informed decisions. And without enough liquidity, you may not be able to exit a trade once you enter it. These are major concerns for penny stock traders. On the other hand, many individuals are willing to embrace these risks for the potential rewards. Once news hits a penny stock and volume follows, the situation can make for highly volatile “supernova” moves of 50-100%+. Before trading penny stocks, it’s important that traders and investors understand what they’re getting into – the potential reward is enticing, but is it worth the risk? That’s a question you need to decide for yourself based on personal preference and risk tolerance.