Sometimes , any stock that trades outside of the major stock exchanges and also that’s taken as depreciatory is often known as “penny stock”. These serious stock exchanges include NYSE, AMEX or NDX . Often the terms penny stocks, tiny caps, and nano caps are brought into use without transposably. But the rank of the penny stock is set by share price, not by market principal or listing service.
Market caps of penny stock are usually less than $500 million. The ones that trade on low volumes over the counter take it as highly hopeful. It is assumed that it may prove hard job to sell penny stocks, when they are acquired. This is down to the plain fact that it may occasionally be tricky to find quotations for specific penny stocks. Financiers in penny stocks are predicted to stay prepared to face the likelihood of losing their complete investment.
Nevertheless, the penny stock is in a position to lure new stockholders with its low price and its likelihood to get fast profits that can reach up to 100 % in certain cases. In a similar way, there always remains the chance of harsh drops which will even reach over ninety percent over the long term. Penny stocks are regarded as investments, in which risk factor is highly concerned. Therefore , stockholders must be conscious of the numerous risks that are concerned ,eg limited liquidity, shortage of finance reporting and crime.
If liquidity is given precedence, then penny stock has extraordinarily less stockholders. It is less “liquid” ; this term suggests that compared to a bigger company, it’ll purchase and sell less shares. Any unobserved change in the demand or supply may result in the randomness of stock cost. Hence , it could lead on to the fast rise in the share price or bring it down to the earth. Because of the absence of liquidity and volatility, penny stock is likelier to be exploited by management, market markers or 3rd parties. It becomes very hard to sell a stock particularly on a day, when there aren’t any customers thanks to the shortage of liquidity.
One more reason is that to stay on the OTCBB, the listing necessities are awfully minimum in comparison to NDX or NYSE. Sometimes , what occurs is that those firms which couldn’t make on larger exchanges or have been de-listed, here they have a chance to get re-listed on the OTCBB or Pink Sheets.
Additionally , if compared with major markets, stocks trading on the Pink Sheets hardly have any regulatory or listing wants. There’s nothing to provide protection to stockholders like accounting conventions, change in notification of possession of shares and such like.
All of these features make it easy to utilize penny stock in any insincere scheme. However this does not necessarily mean that all stocks that are mentioned on the OTCBB are dishonest. Several stocks on the OTCBB have fair-trading.