You have probably heard the term thrown around here and there. On the news or over dinner with our coworkers or in-laws. We know what stocks are, but do we know what these things called penny stocks are? Well, here is a chance to find out.
Definition
If you go looking for a dictionary definition for “penny stock”, you probably won’t have much luck. . The definition seems to be in a constant state of change. In the past, a
penny stock was a stock that traded for less than a dollar per share, hence the coining, no pun intended, of the term “penny stock”. The Securities and Exchange Commission has since modified that definition. We now know penny stocks to be stocks, or shares, that trade below the value of five dollars.
Risky Investments
Wondering why a stock that is valued at more than a dollar can still be called a penny stock? Well, the name doesn’t really rely so much on the monetary amount of the share, it is more how the share is viewed by traders. In this case, penny shares are called penny stocks because when they were given that name, they were perceived as very risky investments. And that perception still reigns among traders today. Penny stocks typically have low trading volumes and limited attention from investors because of this high risk factor. Also adding to the risk is the fact that penny stocks are typically growing companies with limited cash and resources, and they are susceptible to different forms of market manipulation, forms that are less prevalent and more difficult to employ in stocks that belong to larger companies.
So, while penny stocks can be lucrative for educated and experienced traders, it is always good to be wise and know exactly where you are investing.
