Millions of investors end up investing in what the Street refers to as "penny" stocks and they may not even know it. These are often place holders in some portfolios since you can buy many shares for next to nothing.
So what exactly ARE penny stocks?
Contrary to popular belief, penny stocks are not necessarily priced at $0.01 per share; the Securities and Exchange Commission (SEC) refers to any stock priced below $5.00 as a penny stock. They also typically trade outside the major market exchanges, though you many find quite a few listed on major stock indexes. They have low prices per share and generally a very small market capitalization - that is the company is valued at something below $100 million or so, but this is not scientifically defined. If they are not on a major stock exchange, they can trade over-the-counter through the OTC Bulletin Board (or the OTCBB) and what are known as pink sheets.
While they may be cheap to buy, they are quite dangerous to own and carry a ton of extra risk, which most investors are not equipped to handle. They can make you a LOT of money but they can also lose you a LOT of money depending on the stock.
Should investors completely stay clear of penny stocks? It would say yes, UNLESS you know the company, you know the management, and you fully understand what they do, you like their product/service, AND there is potential growth in their respective industry. If you cannot answer any of these questions, then you should not be investing in a penny stock. Just don't do it.
If you remember from Wolf of Wall Street, many sketchy investing firms are paid lots of money to push useless stocks on average investors. They are trained to give you "information" on these stocks, but in reality they know nothing. The lesson here is to trust your instincts when it comes to penny stocks and (as always) DO. YOUR. RESEARCH.
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