For those who would want to engage in stock trading activities, it is important that you know what penny stocks are. These are stocks that represent small cap companies. They usually trade outside big exchanges such as NYSE or NASDAQ. They can be traded over the counter. Other names for penny stocks would OTC or micro cap stocks.

The Risks Of Trading Penny Stocks

Although a lot of people engage in stock activities, penny stocks can be categorized as a high risk investment. There are quite a number of risks that are involved with penny stocks. Some of these risks would include limited liquidity, a lack in financial reports, possibility of fraud and possible manipulation. It is a common thing to receive emails with regard to penny stocks in your spam. They will tell you that penny stocks are a sure investment and you are guaranteed to get good returns overnight. Do not be taken in by this. If you invest in these kinds of stocks, you need to make sure that you plan carefully and you research well.

4 Penny Stock Risks

Information available to the public is incomplete. It is pretty difficult to find information related to micro cap stocks. The reason for this is that penny stocks are only used for companies that are “pink-sheet”  or “otc” listed. If you are listed on pink sheets, this means that you are not required to file any papers with the SEC (Securities and Exchange Commission). They are not open to public scrutiny and are not usually regulated. Because of this, it is rather hard to verify if these stocks are credible.

Not much of a record for past performances. If anyone would make a stock investment, it is important that they would check on the stocks’ past performances. But if one were to invest in small stocks or micro cap stocks, it is almost quite impossible to find some history on it. One reason for this is because these stocks are usually offered to the public by new companies or companies that are on the brink of bankruptcy. Hence it is highly risky to invest in stock that does not have much history.

Liquidity. If one is to deal with penny stocks, there is not much of a chance that they would deal with ranking stock markets. Penny stocks are often traded over the counter. They are commonly termed as OTC investments. Unlike other kinds of stocks, these are not usually dealt with, so it becomes rather difficult to look for possible buyers when the time comes when one wishes to sell them. Because of this, the tendency is to lower the prices until a buyer would get interested.

With no minimum standards: As stocks listed on pink sheets and the OTCBB are not required to comply with certain standards and minimum requirements that other stocks need to fulfill, this sometimes causes a problem with possible investors. Most investors would wish to find a stock that meets the minimum standards on the stock exchange to ensure that they are investing in something safe.

Despite all the possible risks, it is good to remember that penny stocks can still bring about good returns in the future. Just make sure that meticulous research and good planning is done before purchasing them. They can be quite profitable if research has been done in order to avoid mistakes. Consultations with experts in this trade are highly recommended. Stock traders would often provide tools and services you can avail of to help you reach the full potential of your investment.