Penny Stocks: Why these stocks earn better in short time?

There are so many definitions for penny stocks, but basically these are low-traded stocks. While some believe they are traded under $1 and some say those that are priced under $5. In any case, penny stocks are basically low-priced security traded completely over the counter or pink sheets through quotation services. These are considered to be extremely speculative and stocks of high risk.

Penny stocks are characterized by wide price fluctuation and they do not have a single price for each stock in which they are traded. Instead, they have different prices.

Why Penny stocks?

First off, penny stocks have a difference between the bid price and the ask price of the stock. The bid price is defined as the amount to be paid for the security that is the price at which the shares can be sold. While the ask price is how much is to be paid for the shares to buy them. This difference is known as the spread. This spread basically ranges from 25-33% to over 100% as well. This is where the extreme volatility of penny stocks lay.

In literal terms penny stocks basically lure investors to invest in them because of their initial low price and the potential of high return in a short span of time. But as there is chance of high return, there is always an inherent potential risk and that may simply lead to total disappearance of penny stocks from the market. The risks range from lack of financial reporting, fraudulent activities to limited liquidity. If there is any change in the demand and supply of the penny stocks, the volatility of these stocks heighten.

It is lack of liquidity and volatility that makes penny stocks so vulnerable and open to manipulations and hence considered to be extremely risky at least to novice investors. Again, penny stocks do not require maintenance of many regulatory standards and financial disclosures to be listed on OTCBB. Additionally, penny stocks trading in the pink sheets have minimum accounting standards, minimum financial transparency of the company and no notification for change of ownership of shares. These factors are very important to protect shareholders from fraud and loss.

The basic nature of penny stocks makes them vulnerable to fraudulent activities. But, why people still tend to trade in penny stocks? The reasons are far too many. Firstly, penny stocks can be traded even with low amount of money. Second, it helps investors to hedge funds as well. Third, it is the inherent wish of the investors to get rich in a short span of time that drives investors to invest in penny stocks. Next to diversify the financial portfolio with little more aggression and exposure to hedging strategies.