Penny stocks, companies whose shares trades for under $1, are traditionally more risky investments. The majority of time companies trade for pennies per share because of poor financials causing an uncertain future.
The following online brokers are recommended for penny stock trading do to either their:
A. flat rate trade commissions ideal for minimizing cost when trading thousands of shares or
B. their access to shares for shorting penny stocks which is the case of the 3rd broker below.
Published by Blain Reinkensmeyer on Monday, June 16th, 2014 .
Penny stocks typically trade Over the Counter (OTC), meaning they are not listed on a formal exchange like the NASDAQ, and are instead listed as a Pink Sheet or trade on the OTC Bulletin Boards (OTCBB). If stocks listed on the NASDAQ trade below $1 for a certain period of time, the company can be delisted and forced to convert to a OTCBB or Pink Sheet listed security (here's a good article from Investopedia on the topic). That said, not all companies that trade OTC are penny stocks. Some are legitmate companies growing their business with the goal of one day being listed on a major exchange such as the NASDAQ or NYSE.
Penny stock risks - Since most companies trade for pennies a share for good reason, institutions avoid these stocks. With little liquidity available, the spread between the bid and ask can be vast and the stocks are often targets for manipulation through pumping schemes.
In a pumping scheme, stock promoters will gain control of shares and aggressively promote the stock. They do this primarily by sending thousands of promotional emails out to unsuspecting investors in an attempt to drive interest, and ultimately trick investors into buying shares of the stock. With the stock price higher, the promoters then dump their shares for a profit.
Penny stock misconception - With penny stocks, it is a common misconception for investors to think they are getting "more for their money" by buying shares of stock for pennies per share instead of dollars per share. This is completely false. Stocks that trade for pennies are actually much more risky, as highlighted above, and stocks that trade for $1, $10, $100, or higher per share are companies with financials strong enough to support institutional ownership alongside more importantly a listing on a major stock exchange.
While the risks associated with trading penny stocks are high, investors can make money, which is why they are still traded each and every day. Retail investors will forever be attracted to cheaper share prices alongside the dream of buying a stock for pennies a share and watching it surge to dollars per share, yielding dramatic returns. While sadly this is rarely the outcome for penny stocks, the dream of a home run trade is far from dead.