Penny stocks are stocks of small publicly traded companies that are listed on stock exchanges for less than INR 10 per share. They are not commonly traded stocks, and their potential returns are frequently determined by sudden bouts of market volatility.
Because of their lack of liquidity, penny stocks can be quite risky to invest in. For example, you may purchase a penny stock at a low price but then be unable to sell it.
As a result, it is not necessary that you will make phenomenal returns when investing in penny stocks.
While investing in penny stocks, investors should keep in mind that they must be diligent in their research and diversify their entire portfolio to hedge against potential risks associated with the higher return prospects of penny stocks.
Penny stocks are common shares of small publicly traded companies that trade for less than $1 per share. The term “penny stock” is used by the Securities and Exchange Commission (SEC) to refer to a security, a financial instrument that represents a specific financial value, issued by small public companies that trade for less than $5 per share.
Over-the-counter (OTC) trading is used to price penny stocks rather than on the trading floor. The term “penny stock” refers to shares that traded for “pennies on the dollar” prior to the SEC’s classification.
Advisor India examined the top 50 penny stocks listed on the Bombay Stock Exchange and the National Stock Exchange and selected the top penny stocks that could potentially assist investors in building wealth. For this analysis, stocks with an annual trading range of around INR 30 were considered.
Though some penny stocks trade on large exchanges such as the New York Stock Exchange (NYSE), the majority trade over-the-counter (OTC) via the electronic OTC Bulletin Board (OTCBB) or the privately-owned OTC Markets Group.
OTC transactions do not have a trading floor. Quotations are also handled entirely electronically.
When the United States government passed the Securities Exchange Act in 1934 to regulate all securities transactions between parties other than the “original issuer,” the SEC stated at the time that equity securities trading for less than $5 per share could not be listed on any national stock exchange or index.
Penny stocks are typically associated with small companies that have a lack of liquidity, which means that there are few willing buyers in the market. As a result, investors may have difficulty selling stock because there aren’t enough buyers. Investors may have difficulty finding a price that accurately reflects the market due to the low liquidity.
Penny stocks are generally regarded as highly speculative due to their lack of liquidity, wide bid-ask spreads or price quotes, and small company sizes.
Conclusion
As we have learned above, penny stocks trade at any value less than $5. They allow investing in small amounts and help to earn big amounts if the right one is found. They are highly volatile in nature, and because of that, there may be cases where the entire investment may be lost
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