Buying penny stocks is similar to buying stocks on major exchanges, but investors should do extensive research and be aware of the risks. Penny stocks are traded on OTC markets and potential market manipulation is a concern. Investors must buy penny stocks individually through a broker and may have difficulty obtaining information. Penny stocks are lightly traded and liquidity problems can occur.
Anyone with a brokerage account can buy penny stocks that have a designated trading symbol similar to buying stocks listed on major exchanges. To buy penny stocks, investors may want to do extensive research on the company’s background and understand its business operations, because penny stock companies are often small start-ups and tend to be very risky. In the United States, penny stocks are traded over-the-counter (OTC) markets, and their trading activities can be very sluggish from time to time. Investors looking to buy penny stocks should also be aware of potential market manipulation due to the lack of disclosure and reporting as required by OTC traders and the government.
To buy penny stocks, investors must buy them individually through a broker without the benefit of using a mutual fund or exchange-traded fund (ETF) which are widely available in regular stocks. Investment companies, such as mutual funds and ETFs, are regulated to ensure, among other things, that funds do not take excessive investment risk. Brokers who subscribe to OTC trading systems can help investors buy and sell penny stocks. Clients must place orders with their broker by specifying the designated ticker symbol of one cent.
Penny stock companies are likely to see a higher failure rate, because they often don’t have enough capital to sustain operations and there are uncertainties in their search for business. The company’s research provides the basic assurance for investors to buy penny stocks. Information about penny stock companies might not be readily available. To obtain the necessary information, investors may try to contact the company directly or use a third-party research organization. Also, without proper disclosures provided by the government, investors should be on the lookout for potential penny stock scams and market manipulation by suspendible underwriters and brokers.
Investors who buy penny stocks are the few who see potential in companies that have yet to demonstrate things like the viability of their products, their expected earnings, and their manageability. As a result, penny stocks are lightly traded on the OTC markets, which can lead to liquidity problems from time to time. The bid and ask prices quoted by market makers and brokers are typically wider than those seen on traditional stock exchanges, making short-term trading less profitable.
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