Penny Stocks Features and Examples

Penny stocks features are characteristics that differentiate penny stocks from other common stocks. Before now, they were viewed as cheap investment opportunities that offered the most profits, thus the term was commonly used to refer to stocks that traded for pennies on the dollar, meaning that for every dollar invested, you get pennies in profit either monthly, quarterly, or annually.

As a result of this seeming advantage, quite a number of people invest in this type of stock without considering other aspects such as the lack of adequate information on them.

Here, we shall discuss the features of penny stocks, definition, examples, pros, and cons.

Definition

Penny stocks can be defined as a type of common stock that is issued by small companies. Initially, these stocks usually traded for less than a dollar per share, meaning they cost pennies. However, in recent times, the term applies to stocks that trade below five dollars per share.

These stocks were said to be stocks that traded for pennies on the dollar, this meant that for every dollar invested, you receive pennies in profit. Thus penny stocks were viewed as cheap investment opportunities with the most profits.

However, some people used the lack of adequate information on these stocks to cheat investors out of their money through a method known as a pump and dump; a situation where they drive up the price of penny stocks by purchasing a large number and then selling off the stocks once investors begin to buy the stocks in large quantities.

This made it pertinent that some form of regulations is set to curtail these fraudsters, thus the Securities Enforcement Remedies and Penny Stock Reform Act of 1990 was signed into law. It brought about the establishment of an organized electronic marketplace for listing such securities and the reclassification of penny stocks by the U.S Securities and Exchange Commission (SEC)

Since this reclassification, penny stocks are now known to be all ordinary shares that trade below five dollars. Typically, these stocks are traded over the counter (OTC), and as such, they are also known as OTC stocks. They are listed through a facility of OTC Markets Group Inc. known as OTC Link LCC or a facility of the Financial Industry Regulatory Authority (FINRA) known as over-the-counter bulletin board (OTCBB).

Features

1. Low price.
2. High volatility.
3. Low liquidity.
4. High returns.

Penny stocks features are characteristics that make them distinct from every other stock. Below, we shall have a brief look at each of these features.

Low price

Considering that these stocks usually cost less than five dollars per share, they are considerably cheaper to buy compared to blue chip stocks. They can also serve as a means of investing in stocks for people who wish to own stocks but do not have a lot of money.

High volatility

These stocks have the tendency to either appreciate or depreciate in price within a short timeframe. As a result of these, they are seen as a high-risk investment.

Low liquidity

Penny stocks have very low liquidity when compared to stocks that trade on the stock exchange, this is because a lot of investors are wary of investing in startups and additionally due to the high level of fraud that had been previously associated with these stocks.

High returns

These stocks have a high rate of returns, compared to other types of stocks. This is especially so for startups in tech which are considered fast-growth companies, therefore when the company grows and its stock price rises, pioneers who had invested in their penny stocks tend to make a huge profit.

Pros and Cons

The pros and cons of penny stocks will discuss the merits and demerits associated with buying this type of stock. Investors seeking to invest in penny stocks should have this in mind as it can guide them to make a more informed decision as regards purchasing these stocks.

Pros

1. Cheaply priced.
2. Source of funds to startups.
3. Potential multi-baggers.

The above listed are the pros of penny stocks, some of these pros are for the investors while some are for the issuing company. We shall discuss them below:

Cheaply priced

The cheap price of penny stocks makes them an attractive investment option since an investor can purchase a considerable number of these stocks at a cheap price compared to other common stock types which are more expensive.

Source of funds to startups

Penny stocks are issued by startups as a means of raising capital for their business just like convertible preferred stocks. Due to their low price, investors who might otherwise not invest in a startup are often drawn to purchase them thereby giving the issuing startup the much-needed funds.

Potential multi-baggers

The fact that these stocks are issued by startups gives them the potential of becoming multi-baggers, this means that they can earn several times more than what the investor initially invested when purchasing the stocks. Especially when the issuing companies become mature.

Cons

1. They are not readily salable.
2. Inadequate information on issuing companies.
3. Susceptible to frauds.

As with every type of security, penny stocks also have some cons which we shall look at below.

They are not readily salable

Penny stocks are traded over the counter and are generally issued by startups, these make selling them hard as not many investors are keen on buying them since they cannot readily sell them on the stock market.

Inadequate information on issuing companies

Most companies that issue penny stocks are startups, consequently, there is little or no public information available about these companies, their history, track record, financial standing, assets, liabilities, etc.

Susceptible to frauds

Companies that issue penny stocks do not have a certain minimum requirement before they get listed. Additionally, there is no distinct system for tracking these companies. All the aforementioned coupled with the high volatility of these stocks make them susceptible to being used by fraudsters.

Penny stocks examples

Listed below are some penny stocks and their prices as listed on the OTC markets (OTCMKTS) or New York Stock Exchange (NYSE) or National Association of Securities Dealers Automated Quotations (NASDAQ)

Frequently asked questions

Conclusion

Since the signing into law of the Securities Enforcement Remedies and Penny Stock Reform Act of 1990, penny stock trading now has set down rules and regulations which are enforced by the Financial Industry Regulatory Authority (FINRA) and the U.S Securities and Exchange Commission (SEC).

Its cheap price makes it attractive to investors who are willing to take the risk of investing in businesses with little public and historical information. The potential penny stocks have of becoming multi-baggers also makes them attractive; it is however important to have a realistic outlook as not all penny stocks will eventually become multi-baggers.

Furthermore, before investing in these stocks, one should make a thorough investigation to ensure they do not end up falling prey to a pump-and-dump scheme or a fraudulent transaction. With the advent of some penny stocks trading on the National Association of Securities Dealers Automated Quotations (NASDAQ) and New York Stock Exchange (NYSE), coupled with the rules and regulations guiding the stocks that trade on these major markets, the cases of penny stocks fraud have been greatly reduced.