Searching for The massive Issue? Tread with Caution!
Thriving corporations appear up from humble beginnings.
Some buyers feel that locating the following “big thing” indicates scouring by penny stocks within the hope of locating the subsequent Microsoft or Wal-Mart. Regrettably, this method will show for being unsuccessful in most cases. Please read on to understand why pinning your hopes on penny shares could leave you penniless.
Penny Stocks – The basic principles
The terms “penny stocks” and “micro-cap stocks” could be made use of interchangeably. Technically, micro-cap stocks are labeled as such based on their market place capitalizations, though penny stocks are checked out concerning their rate. Definitions range, but in general, a stock having a market capitalization involving $50 and $300 million is actually a micro cap. (Less than $50 million is often a nano-cap.) In keeping with the Securities & Exchange Commission (SEC), any inventory under $5 is actually a penny inventory. Again, definitions can fluctuate; some set the cut-off point at $3, whilst others consider only those shares trading at a lot less than $1 to become a penny inventory. We consider any stock that is trading on the pink sheets or over-the-counter bulletin board (OTCBB) to get a penny inventory.
Four Risk Factors For Penny Stocks
1. Lack of Information Available for the Public
The key to any productive investment approach is acquiring enough tangible information to make informed decisions. For micro-cap shares, information is much more difficult to uncover. Corporations listed on the pink sheets are not required to file with the Securities and Exchange Commission (SEC) and are thus not as publicly scrutinized or regulated as the stocks represented on the New York Inventory Exchange and the Nasdaq. Furthermore, much of the information available about micro-cap shares is not from credible sources.
2. No Minimum Standards
Shares on the OTCBB and pink sheets do not have to fulfill minimum standard requirements to remain on the exchange. Sometimes, this is why the stock is on one of these exchanges. Once a company can no longer maintain its position on one of the major exchanges, the company moves to one of these smaller exchanges. When the OTCBB does require companies to file timely documents with the SEC, the pink sheets have no these types of requirement. Minimum standards act as a safety cushion for some buyers and as a benchmark for some corporations.
3. Lack of History
Many of the organizations considered to be micro-cap shares are either newly formed or approaching bankruptcy. These firms will generally have poor track records or none at all. As you can imagine, this lack of historical information makes it difficult to determine a stock’s potential.
When shares don’t have much liquidity, two problems arise: first, there is the possibility that you won’t be able to sell the stock. If there can be a low level of liquidity, it may be hard to uncover a buyer for a particular inventory, and you may be required to lower your rate until it is considered attractive to another buyer. Second, low liquidity levels provide opportunities for some traders to manipulate inventory prices, which is done in many different ways – the easiest is to buy large amounts of stock, hype it up and then sell it after other buyers find it attractive (also known as pump and dump).
The Bottom Line on Penny Shares
Sure, some organizations on the OTCBB and pink sheets might be good quality, and many OTCBB organizations are working extremely hard to make their way up into the more reputable Nasdaq and NYSE. However, there are good inventory opportunities out there that aren’t trading for pennies. Penny shares aren’t a lost cause, but they are very high-risk investments that aren’t suitable for all buyers. If you can’t resist the lure of micro caps, make sure you do extensive research and understand what you are getting into.