When a small company trades less than $5 per share, it literally means a penny stock. However, small amounts this is, penny stocks trading on large exchanges. These exchanges are New York Stock Exchange, OTC Bulletin Board, over-the-counter, and OTC Markets Group. OTC transactions are not on the trading floor, then you could do quotations electronically. Previously, It refers to any stocks traded below one dollar per share.
However, the U.S. The Securities and Exchange Commission (SEC) transformed the definition. As for now, penny stocks cover all shares trading below $5. In most cases penny stocks tend to point to small companies lacking liquidity. These small companies are mostly having challenges in their marketplace including very few buyers.
Therefore, investors have a hard time selling their stocks due to the few buyers. In addition, investors also encounter price difficulty because they cannot easily reflect the market accurately. This becomes the reason why penny stocks are speculative. The lack of liquidity leads to wide bid-ask spreads or price quotes and small company sizes. So, there is a chance where investors might lose a huge amount of investment.
So, how volatile is penny stock? As it represents developing companies with limited resources and cash, it is suitable for investors with high risk tolerance. This is to say that penny stocks have higher volatility levels. As a result, when investors expect a higher reward, they must face a higher level of inherent risk. Investors are open to losing their entire investment on a penny stock. They could lose more if they buy on margin. Buy on margin means the investor borrowers funds from broker or banks to buy the shares.
