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The Term “Penny Stocks” is also referred to as “Micro Cap Stocks”. A Stock with a market capitalization between $50 and $300 million is a micro cap. A stock with less than $5 million of market is called as “nano-cap”. According to SEC i.e. Securities and Exchange Commission any Stock under $5 is a Penny Stock. Basically in simple words a Penny is a coin or a unit of currency.
A Penny Stock is a stock that trades at relatively low price. The Penny Stocks have high risks because of lack of Liquidity and small capitalization. Penny Stocks are considered to be highly speculative. Demand and supply of Penny Stocks can lead to volatility in the stock price. Penny Stocks have lower price and they have the potential of rapid growth which may be very high in few days. Securities and Exchange Commission warns the new investors to be aware of the high risks involved in Penny Stocks. Risks can be- Fraud, lack of financial reporting, very low liquidity etc. Lack of liquidity can make a stock difficult to sell.
Penny Stocks may trade on all types of security exchanges. Penny stocks do include securities of certain private companies too. They tend to be low priced and trade in Low Volumes.
1. It is mandatory for a firm to furnish the customer a document describing the risks involved in Penny Stocks. It is the first rule to be approved by the customer who will be involved buying Penny Stocks. It is quite important for the firm to get a written agreement from the customer. The firm must tell the customer the current market quotation.
2. In case of Penny Stocks it may be difficult to sell them penny stock shares once you own them.
3. The Investors who have invested their money in Penny Stocks should be prepared for the possibility that they may lose all their whole investment.
It is quite necessary for the investors to have proper knowledge about the stocks and their profits and losses which can be made by investing into the stock of a particular company. The investor should collect all the necessary information about the particular company whose stocks are to be purchased by the investor. It is highly recommended to collect the information before investing.
Lack of Public Information:
It lacks behind reliability, publicly available information. Stock analysts continuously research and write about larger public companies and it’s easy to find their stock prices in the newspaper.
1. You won’t be able to sell the stock. It may be difficult to find a buyer for a particular stock.
2. Some traders can manipulate the stock prices, which can be done in different forms.
No minimum listing standards:
Companies that trade their stocks on different exchanges must meet minimum listing standards. They must have minimum amounts of net assets and minimum number of shareholders
Penny Stocks are most risky. Penny stock Companies tend to be new and have no proven path record. Some of the penny stock companies have no records, no assets, and no operations.
Lack of History & Liquidity:
Many of the companies considered to be Penny Stocks are either newly formed companies or approaching bankruptcy. These companies have poor path records. When the Penny Stocks don’t have much liquidity there can be 2 problems that can be arised:
It is quite important to provide correct information to the public because many frauds depend upon wrong information. Fraudsters distribute junk mails or spam over the internet to spread false information quickly and cheaply to millions of potential investors. There are some dishonest brokers set up “boiler rooms” where a small army of high-pressure salespeople use banks of phones to make cold calls to as many investors they can. Fraudsters often issue press releases that contains lie about Penny Stocks.
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