Penny stocks get their name for their low prices, although they do typically cost more than a few pennies. These are stocks that are priced below $5 and are not usually traded on the stock market. These stocks tend to carry higher risks, but also have the potential for big returns to draw investors to them. Young investors seeking a big one-time payout are especially drawn to penny stocks, but the high risks of these stocks more often lead to big losses.
Where to Buy Penny Stocks
You can find penny stocks on the NYSE and NASDAQ, although these low-cost stocks aren’t typically what is meant in terms of penny stocks. Still, these stocks sell for low prices, technically qualifying as penny stocks, and can be traded like any traditional stock. Since they are traded on the NYSE and NASDAQ markets, these companies are more established and offer a slightly lower risk of loss.
More volatile penny stocks trades are done on the Over-the-Counter Bulletin Board or OTCBB. They can also be found listed on pink sheets, which provides quotations for registered stocks. Among these options, using pink sheets to buy penny stocks is especially risky. Many investors consider pink sheets to be the wild west of stock investing, due to the volatility of the market.
The Risks of Penny Stocks
Since penny stocks typically aren’t found on the major exchanges, they’re also not subject to the rules set out by the SEC. This means you will likely find it difficult to research a stock’s financial history. You’ll find it difficult, if not impossible, to review financial statements for these companies. Typically, they choose what is released, which means the information you do find may not be as detailed as you would hope.
Additionally, these are usually newer companies. They have either just gone public, or they may have been publicly traded for a very short time. In either case, there will be very little information to find out about them. There’s very little data to help you forecast a future for these companies, which means buying their stocks represent a bigger gamble.
While the appeal of penny stocks is obvious, they don’t come without high risks. If you are interested in trying your hand at this type of investing, be sure to do your due diligence in researching your stock choices. Also, be aware that you’ll likely suffer losses, so only invest what you can afford to lose.