As a new investor, you could easily feel discouraged to buy stocks once you see their prices per share. Luckily though, there are stocks available known as penny stocks.
The good thing about penny stocks is that you are able to obtain thousands of them for the same price as one share of another company, depending on which company it is.
However, you need to be aware of the dangers before you make the investment. Below, we have five things investors must know about penny stocks and which penny stocks to buy today.
1. Decreased Liquidity
With the SEC regulating the stocks of major companies on the stock exchanges, this means the companies need to submit pipework related to the stocks.
But when businesses have a value that is under $10 million, then the SEC does not worry about them. Not only that, but the penny stock company also avoids a lot of scrutinies as compared to the bigger corporations.
Penny stock companies are traded on exchanges known as over-the-counter and do not have the same amount of regulations as the others. The reason for it is due to the fact that they were made known via pink sheets that listed them. This type of service was under no heavy regulations by the SEC.
2. Prerequisites to List the Stock
When it comes to being listed on the stock exchanges, the stock must meet a few prerequisites first.
A few characteristics a stock needs to have included the following:
- A share price that has a $4 minimum
- At least 1 million shares traded that have a minimum value of $40 million.
- A minimum of 400 investors owning a minimum of 100 shares each.
For penny stock companies, they have a difficult time trying to satisfy these minimums. There could also be a dozen reasons as to why they are not able to. Regardless, when a listed stock’s price begins to trade for less than $1 and the price does not increase, it will be removed from the exchange list. This is when it goes to the over-the-counter stocks list.
3. High Amount of Unpredictability
A penny stock can be heavily affected by the slightest bad or good news about it. With penny stock companies, their sheer size and any success they achieve may be caused by a good event that affects the company. The amount of share trade demand can also cause a change in the stock’s performance.
If any penny stock has a major positive fluctuation in price, then the stock will instantly create returns for the investments. However, you may also experience a massive decline in value without warning.
4. You Could Be Stuck With Them
The volume for trading penny stocks is very low. This means you have to wait in order to make a trade because of the infrequency that they trade. So if you want to sell, you may be stuck with them for a longer amount of time than you had anticipated.
For example, if 10,000 shares are owned, and the volume for trades is set at 1,000, then it will take you 10 days to sell off all of the stock you own. Plus, you may also need to trade at a much lower price.
In other words, investors refer to this as being low liquidity, and the only way to make fast cash will be by decreasing the selling price.
5. Fraud Could Be Connected to Them
When it comes to penny stocks, there is always a danger of fraud. To avoid fraudulent scams you need to be aware of the two types that are used. These are short and distort and pump and dump. Regardless of the method used, the end result will always be the same for the investor.
Investors utilize a method known as selling short when they believe that the overall value of the stock will decrease. When a scammer targets an investor, the stock will be short and they begin to provide false business information. As soon as the price beings to drop, the scammers earn money.
With the pump and dump, a fraudster advertises positive news that will increase a share price. Once investors buy a ton of shares, the scammer sells theirs at a higher amount.
Best Penny Stocks Today
Below are the four best companies that offer penny stocks:
- Sesen Bio Inc.
- Foresight Autonomous Holdings Ltd.
- IZEA Worldwide
- Phunware Inc.
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