The Risks In Trading Penny Stocks
Market capitalization or market cap is amount that you can obtain by multiplying the number of all stocks issued by a company with the price of the same stocks. Market cap is telling us if the stocks can be classified as penny stocks or not. The large market cap stocks are traded on the stock exchanges because if a company possesses a large volume of stocks it can find it difficult to sell all of these through the “over the counter” method. It is possible to find large market cap on the pink listings or OTCCB but these listings are commonly for stocks that are low in volume and in price.
Trading through the “over the counter” method is infrequent and there are not severe regulations as if trading the stocks on the stock exchange. All stocks which are traded on the stock exchanges are supervised by the SEC which assures the traders that all companies there have a solid reputation. Also the SEC takes care of transparency in trading and safeguards the interest of the buyers.
By trading over the counter you have no transparency. You are not sure if a company has good history or not. Actually there are not many regulations. The companies which are selling the stocks over the counter have a small volume of stocks and the price is very low. Also this may be the first issue of their stocks on the market. All this lack of regulation is increasing the risk in investing in penny stocks.
There are also some other reasons which are increasing the risk when someone invests in penny stocks. You have no full or adequate information about the company which is selling the stocks. This may cause a loss of money you have invested because in the future the company may not perform well. You can loose your money if you don’t know about the history of the companies.
You are advised to be careful when investing in penny stocks. They are highly speculative stocks. On pink listings you can find stocks that you are interested in but if you have chosen the right penny shares, in the future you may find it hard to sell the stocks if the price is going up. This is because the trading of penny stocks is not widely done. You can have a lot of difficulty selling the penny tocks and if the price is going down. This is of course the problem with liquidity. You don’t have money when you need it.
But investing in penny stocks can give you some profit for low starting investment. This is the advantage when investing in them. Also if you are beginner you are advised to put your money in these stocks because of low price of them, so if you make mistakes, the loss will not be enormous.