Penny stock or known as the “cent stock” in some countries is known for its buying and selling of common shares of common public companies at a low rate per shares.
Features of A Penny Stock
- Highly Speculative: By highly speculative we mean the outcome is quite unpredictable, the risk is unquantifiable and the rewards are immeasurable. There is no written down rule that tells us if we are going to have a high turnover or a high debt over.
- Small scale: Penny stocks deal on the border of small scale businesses, which means that the company that trades on the penny stocks are those that are “greenhorns”, infant businesses with low cash reserves and little or no track records.
- Versatility: Penny stocks trade on other securities exchange markets and are most notably in foreign stock exchange markets. Quite popular in the U.S and other countries, it is clearly making its presence known far and wide.
All in all, penny stock is a highly speculative, over-the-counter trading of low stocks and shares from low public companies at a relative low price. It uses pink sheets and goes through the OTC Bulletin Board for an over-the-counter trading of stocks and shares, operating anywhere and everywhere on the stock market, but are seldom seen on the major stock market exchanges.
The Birth of Penny Stocks
The penny stock is first created through the process called IPO (Initial Public Offering) like every other legal public trading stock, this process starts with the filling and filing of a registration statements with the Securities and Exchange Commission (SEC), and in some cases a statement that clearly details out why its exemption from the registration process. After the registration process is the checking, here the penny stock checks with the state securities law to ascertain if it can sell stocks in that location. In the completion of this comes the soliciting orders process from investors to sell. And finally comes the part where the company either sells the stocks over-the-counter or have it listed as a stock on the Exchange market. Now that the penny stock is available, here’s how it works, although highly risky, the penny stock transforms day trading to another level, unlike the major stocks that opens in the morning and closes when the bell rings, the penny stock allows trading between hours, minutes, or even under seconds.
The Risks of Penny Stock
Every trading has its high turnover of risks and the penny stock is not particularly left out of it. Known for its high risk, anyone trading in the penny stock should be highly cautious and careful. Here are some of the possible risks of the penny stock:
- Information: There’s a lack of information or better put, lack of better information on the penny stocks. We all know that information is key to every success, so to succeed in the penny stock, you need credible information on the market.
- History: Most companies on the penny stock are either new or almost bankrupted companies, this basically implies that a lot of historical information will either be left out or not even existing.
- Liquidity: This is the key of every stock, high liquidity results in a high demand, low liquidity results in a low/no demand. Also the higher the liquidity, the lower the manipulation of the traders, the lower the liquidity, the higher the manipulation of the traders on the stock.
There is a whole lot of risk on the penny stock, but is it worth it? The next article will discuss that and more.