I never paid attention to all these ads about penny stocks (you know, make 100% of your investment in a week or so), but lately I’m noticing these ads more and more, so I decided to make a small research on penny stocks to know what they are, whether they are a good investment or not, and whether they are a scam or not.

What is a penny stock?

A penny stock is a cheaply priced stock that is listed in any market, but they are more likely to be found on OTC (over-the-counter) markets, where the standards and the financial requirements for companies to be listed are almost negligible.

What is the maximum price of a penny stock?

Technically, a definition of a penny stock is any stock trading below $1 (although there is no official statement by any financial regulator on what is the maximum price of a penny stock). However, many investors state that penny stocks are those stocks that trade below $5. According to these investors, both C (before the reverse split) and SIRI (which was up 4.5% today on more than average volume, hmmm…) are considered to be penny stocks.

Are penny stocks a good investment?

It depends on whether you have some good information about the stock or not. If you do, then there’s a huge possibility that you will make a substantial amount of money, but then again, if you don’t have any information, or even worse, you are misinformed, then expect to lose a lot of money.

Are penny stocks a dangerous investment?

Unless these stocks are traded in the NYSE or the NASDAQ (by the way, if you want to adopt the definition of a penny stock which states that it’s any stock that is below $1, then bear in mind that both the NYSE and the NASDAQ will delist a stock that trades below a $1 for more than 1 month) then yes, penny stocks are very dangerous. The swings, in either way, can be very high. Sometimes penny stocks trade for 2 cents, so 1 million shares per trade would only cost the investor $20,000, but that would create a huge volume.

What are the advantages of penny stocks?

There are a couple of advantages to penny stocks:

• Potential to make a lot of money if you are well informed (which tends to happen mostly if you work inside the company issuing the stock).
• Ability to buy a lot of shares for very little amounts.

What are the disadvantages of penny stocks?

There are many disadvantages to penny stocks, including:

• Most of these stocks are scams. Unless these stocks are trading in the main markets (NYSE, NASDAQ, or AMEX), then the possibility of them being a scam is quite high. This is because regulations in OTC markets are quite lose, so someone could just list a stock there under a fictional company, make some buy/sell trades on the stock to make it seem as if there is movement in order to attract (not so smart) investors.
• Penny stocks are dangerous stocks. As stated earlier, the swings in these stocks are high, often too high. For example, a 2 cent stock goes up 50% when it goes up only 1 cent (and it goes down 50% if it goes down just 1 cent). This is just too dangerous, at least for my taste.
• Penny stocks can just disappear. As I said before, there are no strict standards for companies to be listed in OTC markets. So, a not-so-strong (if not fictional) company may go bankrupt one day, and you may lose all your investment (if you consider it an investment).

Someone recommended to me several penny stocks listed on the Canadian market, all of the stocks he recommended went up, but again, this thing is just too sour for my taste, and I don’t trust stocks that are issued by companies that do not meet the criteria to be listed in real markets. I would never ever recommend a penny stock listed on the OTC markets.