What are Penny Stocks?

Penny stocks are what their name indicate: stocks that are worth roughly around a penny. This is not strictly the case of course. Usually penny stocks are cheap stocks that are sold mostly outside of the major market exchanges. They may be referred to micro-cap stocks as usually, small and newly formed companies carry them.

A lot of people define penny stocks in different ways but they all describe cheap stocks outside major markets. And because these stocks are cheap and trade outside, it carries high risk and are highly speculative. Other notable features of penny stocks are its low liquidity, small capitalization, wide bid-ask spreads, and restricted disclosure.

The main appeal of penny stocks is its cheapness. But besides that, there is mostly disadvantages. Here are some of those.

1) Limited Information.

Penny stocks typically have little information available to the public. This alone is why penny stocks are highly discouraged. The number one rule of trading is to research and researching on a stock with no information renders the trader a fool. The trader will be trading in the dark and he or she will be likely only depend on luck.

2) History-less

Penny stocks are also called micro-cap stocks. This is because most companies that carry them are either new formed companies just starting their journey, still vulnerable to anything, or companies nearing bankruptcy. For those new companies, there is no available history meaning traders won’t know how it will handle difficult situations and how it will fare during bad markets. No history essentially means no information as well.

3) Low Liquidity

Another unappealing feature of penny stocks is its low liquidity. This essentially lowers the chances of stocks being sold.

Penny stocks are easy to trade but trade it at your own risk.