Penny Stocks Are Cheap for a Reason

Penny StocksCan you buy a stock for a penny? Not really. Generally, penny stocks are shares of companies that trade for under $5 (some define them as shares trading under $1).

Why are penny stocks so cheap? Sometimes the company is on shaky ground, so you get what you buy. In other cases, the company could be a solid investment.

What’s the appeal? You can buy a lot for a little—and small gains can (or may) add up. If you buy 150 shares of Company X for $1 each, and the price goes up by 10 cents, you’ve made $15, a 10% gain.

What’s the downside? Penny stocks are highly speculative (translation: risky). Few penny stocks are traded on the big stock exchanges.

Usually they’re traded over-the-counter (OTC) through stock quote services like the Pink Sheets, so it’s hard to dig up solid financial info about those companies.

According to OTC Markets, reporting rules differ depending on what tier of the over-the-counter market you’re buying into. The OTC Pink is the third tier, and “has no financial standards or reporting requirements.”

Penny for your thoughts. Have you ever bought penny stocks?

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