Theoretically speaking definition of penny stocks varies. They are also known as microcap stocks. It a fund that is named based on the market capitalization of the company and value of the shareholder. As per the U.S. Securities and Exchange Commission, this action is also called because its share price is below $5. There are many investors that believes that penny stocks are the one having share price below $1.
If you have an interest in this market and want to invest in this then first of all you should be clear with the difference between penny stocks and other types of stocks. As we know that the performance of large and mid-range stocks are considered as a first position and they are also known as foundation of this industry. Some people believe that performance of these stocks is always at first. If you thoroughly look at the around 100 penny stocks then you can surely see that two or three of them has generated good return of investment.
There are some problems associated with penny stocks. Some of the investors are interested in investing in such stocks and they also believes that some of the blue chips were also penny in past. In fact, share prices of these stocks are been never traded for pennies. If you thoroughly investigate the fact then you will surely come to know that prices of such stocks are splits. Many people are not known to these facts.
There are many stocks in these market are traded on pink sheets. They are even not scrutinized by SEC. It will be surely difficult to get proper information about such stocks. Even they are not having proper liquidity. This means that for investors it will surely become difficult to buy them or sell them. This lack of liquidity means it also helps fraud investors. They can easily manipulate these items. Even SEC has also stated in one of the statements that one should be aware that hot penny picks can lose all the investments of yours.
Small picks in this market are generally traded on OTC and they have good chances of getting excluded because of lack of compliance. If any company is not able to list the shares in the stock then it is proved that investors will surely lose all of their investments. You can surely and seriously consider this fact incase if you are planning to play for long in this market.
Some of the new comers in this market are always being attracted with cheaper penny stocks. They have very low price and it is also seen that they might have possibility to gain good amount. We have seen many situations in past where penny stocks go up to 1000% growth and suddenly come down. There were many situations where penny stocks lose their complete values. If you are new to this market then you should be clear with all the risks that you might face. If you are still interested in investing in this market, than just simply ignore the theories that you might read about such stocks in past.