What are penny stocks?
Penny stocks are usually categorized as stocks that trade under $5 per share. These stocks are typically considered highly speculative and risky because of a variety of reasons including lack of liquidity, large bid-ask spreads, and limited disclosure. Many penny stocks trade on the OTCBB and pink sheets. However, there are many penny stocks that trade on listed exchanges including the NASDAQ and foreign exchanges.
Some of the most successful companies in the world have been penny stocks at one time, and many huge companies still trade for under $5 share. However, some people consider penny stocks to be stocks that trade below $3, and others consider stocks under $1 to be penny stocks.
Penny stocks are sometimes referred to as micro-cap stocks. Micro-cap refers to a market capitalization, or value of a company’s outstanding shares. Micro-cap stocks are generally companies with a market capitalization under $300 million.
Despite their speculative nature, penny stocks can be very volatile and provide huge, short-term gains for investors. Obviously, not all penny stocks can provide huge returns. That’s why research is so important. It’s crucial that any investor seeking to diversify their portfolio with penny stocks conducts thorough research and due diligence on prospective penny stock investments.