Penny stocks are those that trade for five dollars or less on over the counter markets. Most of them can be found for under one dollar per share. Their low price makes them very attractive to novice investors but behind that is a high level of risk. In general, it is best to avoid these stocks unless you are positive they will result in a windfall.

These stocks, also referred to as pink sheet stocks, are incorporated into the portfolios of only the most speculative investors. Statistics show that three-quarters of companies with share pieces under five dollars go into bankruptcy within ten years. Gambling on these odds is quite a risky move by the average investor.

Bid-ask spreads on these stocks can be larger than the entire annual return in the S&P 500 Index. In addition, the low price and relative obscurity makes them targets for manipulation and fraud. In some cases, this low price is masking the fact that the company itself is a sham. In others, unscrupulous investors hype up the stock, only to cut and run with the money once other investors have come on board, increasing the share price.

In some cases, these companies are not based in the U.S. and are not subject to as much regulatory oversight. This means that investor protection is not as comprehensive as with shares subject to stock exchange regulations. Only individuals willing to accept the inherent risk will venture into this territory.

Despite the consensus to avoid penny stocks, some people still invest in these. They may know it is a gamble and budget for it as such. In some cases, they enjoy the rush of the bet and figure though they may lose for several years, they can then gain enough one year to break even on the investment.

Keep learning more:

1. Why People Invest In Stocks


2. Stocks 101: How to Invest in the Stock Market


3. Do Not Put All Your Money In Stocks


4. What Is Dividend Investing


5. TIPS 101: Treasury Inflation Protection Securities


6. What is FOREX?


7. What Is Value Investing

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