So you’ve got a few bucks lying around and you’re thinking about buying some stock. Your stash amounts to only a few hundred dollars, not enough, in your opinion, to buy into the traditional listed stocks that trade for up to dozens of dollars per share.
No, you want to leverage your investment by buying abundant shares in lower priced common stock. Stocks under a dollar share. In other words, penny stocks.
Penny stocks involve risks not normally associated with larger, listed firms. So investors, especially smaller, new investors, should proceed with caution.
Penny Stock Risks
The SEC defines a “penny stock” as anything trading under $5 per share. But the street regards a penny stock as a share trading for less than a dollar each, and in a non-listed firm. Which means trades are reported on the OTCBB (Over The Counter Bulletin Board) rather than tickers from the exchanges, including NASDAQ.
Penny stocks can be risky because the companies themselves are small. And because they are unlisted, the financial reporting standards imposed on larger firms and all listed firms are less stringent, and information can be sparse and sometimes unreliable. And, they are favorites of scammers who drive up prices through unreliable information with the intention of getting out before the bottom caves in.
Picking Penny Stocks
If you’re still interested, use the internet to do all the research you can. Liquidity can be tricky in this realm, meaning you may be forced to hold your stock longer than planned, so it should be a solid investment fundamentally rather than simply viewed as a short-term trade.
This is why most penny stock holders are those who are associated with or have close proximity to the companies themselves, allowing them a first-hand view of performance and prospects.
Make sure you deal with a registered broker/dealer who has you sign an agreement and has provided you with a statement of the inherent risks, as well as disclosing their commission. Beware the scammers, they’re out there.
And if you do have more than a few hundred dollars to invest, consider limiting your exposure in the penny stock realm to a small percentage of your overall portfolio. With risk and liquidity issues this challenging, it’s easy to turn a long-term strategy into a short term disaster unless you take great care with your choice, both of company and broker.
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