What are penny stocks

Penny stocks


Briefly & simply explained:

Penny stocks understandable & concisely defined

Penny stocks are stocks with a value of less than 1 euro in the euro area or less than 5 USD in the USA. These stocks are a popular object of speculators, since small price fluctuations can lead to high losses but also to price opportunities.

Penny stocks or penny shares are stocks with a very low market value of usually less than one unit of the local currency per share. The primary focus is on US stocks from mostly little-known issuers that are traded over the counter. Penny stocks have become known in Germany since the attempt by Deutsche Börse AG to organize stock market exits for shares with a market value of less than one euro. A number of new penny stocks are often produced, especially in the wake of financial crises, such as in 2008.

High volatility

A characteristic of the majority of penny stocks is their enormous volatility, i.e. the range of fluctuation in the price. The price of penny stocks can fluctuate by double-digit percentages in either direction within a day. This makes penny shares an interesting but also very risky form of investment for speculators. In the short term, enormous profits, but also equally enormous losses, are possible when trading these stocks.

Low liquidity

Liquidity in the penny stock markets is generally poor. Trading in these papers takes place much less often than in other stocks. The low trading volume harbors risks when attempting to sell. In the event of price drops, distress sales are often not possible because the investor can only find a few buyers in the (over-the-counter) market. As a result, exchange rate losses are often exacerbated.

Penny stocks lack of transparency

The issuers of penny stocks are mostly small and little-known companies. Penny stocks are rarely index-based, as they usually do not meet the requirements of stock market indices. They are therefore not subject to any significant regulation and no transparency requirements. Company reports such as annual reports do not have to be published. This makes it difficult for investors to assess the real value and development potential of the issuing companies that offer penny stocks. In addition, this lack of transparency offers room for abuse, rumors and misinformation that can neither be proven nor refuted and are therefore problematic for investors or non-insiders.

Penny stocks: highly speculative form of investment

The combination of enormous price fluctuations, low trading volumes and a lack of transparency makes penny shares a highly speculative and risky form of investment. The possible profits are enormous and often possible within a day or a few hours, from which well-informed day traders can benefit. The equally large possible losses, coupled with the low liquidity, are risks that must always be taken into account. These stocks are less suitable as a medium to long-term and solid form of investment. A distinction must be made here between cheap, i.e. undervalued, stocks, which have a relatively high potential for price increases, and cheap stocks, the value of which is actually not higher, but often even lower than the price paid.

Summary Penny Stocks

  • Very low market value stocks (less than one unit of local currency per share)
  • rarely index-based, trading mostly takes place over the counter
  • high volatility (price fluctuation range)
  • low trading volume
  • highly risky and speculative form of investment
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