What are penny stocks, and why do some investors eye this type of stock with distrust while others view penny stocks as a great investment opportunity? Penny stocks are stocks which trade for five dollars or less per share, and some of these stocks may have a share price that is a fraction of a penny. Some investors choose to trade in penny stocks in the hopes of finding the next Google or Microsoft, and some of the most well known companies and even blue chip stocks today started out with a share price that would qualify as a penny stock. Penny stocks can carry many risks, but can also offer unlimited potential when the right penny stocks are chosen.
There are a small number of penny stocks that are traded on the major exchanges, but most of these stocks are traded over the counter, also referred to as OTC or trading on the pink sheets. Smart investors tend to avoid most penny stocks which have a share price that is only a fraction of a penny and that are traded OTC, because the risk of price manipulation and stock scams with these choices is very high. One advantage to penny stocks is that usually a much smaller initial investment is required. There have been cases of investors becoming incredibly wealthy by purchasing penny stocks which have taken off, but this result is not typical and penny stocks must be carefully researched and evaluated to lower the risks some.
Penny stocks have a number of scams and frauds associated with them, and these should be avoided. A common scam is for an individual to purchase large blocks of low quality penny shares trading at a fraction of a cent, and then to start rumors concerning the company and stock possibilities. The share price goes up, the individual sells all of their shares at a terrific profit, and newer investors are left holding stock that is basically worthless once the real facts are known about the company and stock being traded.
Penny stocks can be very risky, but when careful research is done and top quality stocks in this price range are chosen the rewards can end up being tremendous. Many investors will trade penny stocks, but only those which are listed on a major exchange. This helps limit any risks, and ensures that the stock traded is a quality choice. Penny stocks traded OTC or in the pink sheets may not have much information or company history available, and this means it may not be possible to evaluate these stock choices properly. Penny stocks included in a major exchange have met the listing criteria for that exchange, making them a much better option for most investors.