Penny stocks come up a lot when doing research about investing and advertising and may have a new investor believing they have the potential to make someone a lot of money out of very little. In some cases, that can be true since they generally trade for under $5 with low market capitalization, but often times Penny stocks, which are traded outside of the major market exchanges, are tricky to regulate and have a history of being wrought with fraud.
Are Penny Stocks Safe?
Penny stocks are commonly regarded as highly speculative and high risk as a result of their lack of liquidity, large bid-ask spreads, small capitalization and the few disclosure requirements they are subject to. Some penny stocks have become more legitimate in recent years as a result of the new owner of the pink sheets. Penny stocks are usually traded on the Pink Sheets or the Over the Counter Bulletin Board. The Pink Sheets now require that the filings for penny stocks be taken online where they are subject to greater accountability. Prior to this, records of penny stocks existed only on paper.
The name penny stock does not imply that a penny stock trades for 1 cent since there is some debate on what can be considered a penny stock. Some investors consider a selected stock trading for under $5 a penny stock while others believe the term refers to stocks trading for under $1. Typically a penny stock is a tiny company with speculative shares that is not required to file as exhausting disclosures, filings or meet as many regulatory standards as those trading on the more established exchanges.
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