Penny stocks are considered high-risked investment as the brokerage firms are required
to send documents to potential buyers describing the risks of penny stocks.
Penny stocks can be considered as any stock whose shares sell for less than $5 over the counter like the OTC Bulletin Board or Pink Sheets. Some may also call it cheap stocks sold on normal securities exchanges, while others may call penny stock as those purchased below $1. Penny stocks are equity shares of small companies that trade in relatively low volumes.
Penny stocks are considered high-risked investment as the brokerage firms are required to send documents to potential buyers describing the risks of penny stocks. Penny stocks belong to unproven companies so their stock prices are extremely volatile. Finding information about small companies can be difficult. Some of the penny stock prices are as low as 10 cents a share, even a decline of 1 cent per share amounts to a 10 percent fall in value. On the other hand, penny stocks can also give high potential gains, as some of the small companies grow to become very large and successful.
Another concern that penny stock investors should be aware of is the possibility of fraud and price inflation in the penny stock market. The prices of stocks are obtained by the supply and demand for the stock. Larger stocks with large share volumes usually do not have a great impact on share price. A single person with sizable resources can artificially inflate share prices by buying many shares to attract attention from the market and spur more buying, at this point the original investor makes a large profit, while latecomers stand to lose a lot of money. Owing to poor information, an investor might spread favorable rumors to prop up share prices before a sale.