Investing in penny stocks can be lucrative, but it can also be risky, which is why many traders avoid penny stocks when looking for cheap stocks to buy.
The vast majority of penny stocks originate from untested small companies that don’t have any past performance to accurately judge their performance on the market. As a result, most penny stocks are traded over-the-counter (OTC) on either the OTC Markets Group or OTC Bulletin Board.
Ideally, penny stocks trading works best when you identify a positive market trend, purchase shares quickly, and then sell penny stocks before the value dumps again. This is one reason why penny stocks are considered risky investments, as trading strategies are almost always short-term.
In terms of personal finance, penny stocks are not likely to make you millions.The following are some of the most prominent risks that traders need to recognize before diving into the penny stock market.
Penny stock companies usually fall on the other side of this spectrum, with few shares and little movement. This limited liquidity can make it a challenge to buy or sell shares quickly without impacting the stock price.
Alongside having few shares, several penny stocks come from companies with little to no track record. Even if they look good on paper, these ventures have yet to prove themselves in the real world.
Although fraud on NASDAQ or the NYSE is relatively rare due to stringent regulations that a stock must follow, scams are much more prevalent on the OTC.
OTC stocks tend to have a very low market capitalization, with most small companies on OTC trading platforms valued at under $300 million.This is why their share price is so low and accessible, but it also means that the company can crumble very easily.