While there is no clear cut definition of penny stocks, generally they are defined as any stock that sells for less than $5.00. They are most likely offered by smaller, newer companies who have yet to get on the big board.
Because they are newer companies, financial information on these stocks is very limited and less liquid, meaning it doesn't trade as many shares per day as a larger company. These companies are unproven and aren't generating large revenue yet. As a result, a financial report may not be available and and can make it extremely difficult to sell a stock especially if there are not buyers that day. In addition, penny stocks are volatile and unpredictable as they can go up or down 50% or greater in one day.
The low cost and unpredictability of penny stocks is what makes penny stocks appealing because of the potentially large gains. Investors in larger, more established companies don't have the same opportunity for gain as they are much safer. Penny stocks can give an investor large profits over the short term, but can also lose all your money in the same time period.
Despite the lack of information provided about these companies, as an investor you should research them to check their credibility. Because financial reports probably aren't available, calling the company is the most effective manner of research. If no contact information is available anywhere, investing it them probably isn't a wise decision.
Overall, there are advantages and disadvantages to investing in penny stocks. While they are unknown and risky, they provide a potentially great reward with great gains. The key is do research and ensure you know what you are getting in to.
Save This Page