What are penny stocks in the financial market?

If you're looking to make some big returns on the stock market, penny stocks might be the way to go. But there's some of the riskiest investments you can make, and you have just as much chance at losing all of your investment by purchasing them.

Penny stocks are typically stocks of small companies that trade for less than $5 per share, often even under $1.00 per share. Penny stocks sometimes trade on larger exchanges like the New York Stock Exchange, though most trade over the counter through private trading groups. One might look at penny stocks and think, well, if this $0.50 stock goes to a dollar, I'll quickly double my investment while this is true just because of penny stock. Is cheap does not mean that it is a good investment?

Generally speaking, penny stocks trade very infrequently, meaning that when you do want to sell, it can be hard to find a buyer. This low liquidity means that without sudden massive interest in the stock, it's hard to actually take your profit when you do want to sell. While some companies start out as penny stocks due to small volume and overall lack of market interest, other companies can become penny stocks. If their value drops low enough, if a company announces they're doing quite bad financially overtime, their stock could drop from $50.00 per share down to one or $2.00 per share, which will often cause them to get kicked off their exchanges or delisted, making it even harder to sell your shares of their stock.

How penny stocks work?

The reason penny stocks are attractive as investments is because of the significant potential upside. You might buy $100 worth of a $0.50 penny stock giving you about 200 shares to own. If that company does really well and more and more people want their stock, let's say the stock price gets pumped up to $10 per share. That means you could sell your investment for $2000. You just made $1900 off of a $100 initial investment. That's huge return, and it can happen, but more often than not, penny stocks will leave you with less to little of anything. At the end of the day, there's a reason. Penny stocks aren't worth much because they're risky, volatile, and often not the best companies. But if you do like risk, penny stocks might be your thing, but they're closer to lottery tickets than they are, like buying a share of Google or Facebook. One of the final main reasons that penny stocks can be dangerous investments is the lack of regulation. Companies listed in the pink sheets or over the counter stocks where most penny stocks are traded lack regulation by the SEC or Securities and Exchange Commission.

That means that they don't have to file paperwork for many actions that may otherwise signal to investors that the company is actually not doing very well. Penny stocks are rife with fraud due to this lack of oversight, making it harder to judge your potential returns as an investor. All of this said, penny stocks can be a fun gamble if you've got a few bucks you're willing to lose on a risky investment. Just make sure you do your research before clicking that I or even that cell button on your investment.

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