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What are penny stocks?

Penny stocks, also known as “junk” stocks, are securities of small or problem-riddled companies that usually trade at a price of less than $5. They are not frequently-traded stocks. Such assets are set apart by high volatility. Quotes can rise and fall by hundreds of % in a short time.

Penny stocks may work well for traders, but investors would be better off treating these stocks purely as venture capital investments.

Where are penny stocks traded?

Some penny stocks are present on major exchanges such as NYSE and Nasdaq. But most of them are traded on the over-the-counter market. In the US, the transactions are carried out on the OTC platform.

This market is risky. Common occurrences are price manipulation and low liquidity. If you buy a share, you may not sell it quickly.

The quality of issuers is poor. Getting listed on the OTC platform is much easier than on a classic stock exchange.

You can search for junk stocks on any stock-screener, sorting them by price.

Other weak points

  • Stocks are inherently riskier than mid-cap and blue-chip stocks.
  • Weak fundamental state. These can be start-ups without stable financial flows or a precise business model.
  • Low liquidity and large spreads.

How should we value a penny stock company?

It’s a speculative asset on which you can easily make an insane profit but just as easily and quickly lose money, especially using leverage. The risks of such investments increase exponentially.

Let’s sum up

Penny stocks are securities of small or distressed companies priced under $5. Often, such low-quality papers sell on over-the-counter markets. OTC means minimum requirements.

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