risk - How risky are penny stocks? - Personal Finance & Money Stack Exchange
Stocks under 10 cents?
RH does not offer traditional "penny" stocks or subpenny stocks as they are all mostly found on OTC markets. If the stock being talked about on here is under 1.00 then it is likely a company that is not doing well financially, a drug trial, a basic materials company, or a start-up. The NYSE generally delists companys that fall under .10 and I think that threshold is higher for the Dow and the NASDAQ.
More on reddit.com3 Penny stocks that may just fck around and go 10x - Stocksy's Weekly DD
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Penny stocks are only appealing to the brokers who sell the penny stocks and the companies selling "penny stock signals!". Generally penny stocks provide abysmal returns to the average investor (you or me). In "The Missing Risk Premium", Falkenstein does a quick overview on average returns to penny stock investors citing the following paper "Do Investors Overpay for Stocks with Lottery-Like Payoffs? An Examination of the Returns on OTC Stocks". Over the 2000 to 2009 time period, average investors lost nearly half their investment. A comparable investment in the S&P over this period would have been flat see here.
There is a good table in the book/paper showing that the average annual return for stocks priced at either a penny or ten cents range from -10 percent (for medium volume) to -30% to -40% for low or high volume.
A different paper, "Too Good to Ignore? A Primer on Listed Penny Stocks" that cites the one above finds that listed, as opposed to OTC "Pink Sheet" penny stocks", have better returns, but provide no premium for the additional risk and low liquidity.
The best advice here is that there is no "quick win" in penny stocks. These act more like lottery tickets and are not appropriate for the average investor. Stear clear!
Consider firstly that they're penny stocks for a reason - the company just isn't worth much. Yes, it could take off but this happenstance is rarer than you think.
Next, there is the problem of how you'd find out what the good stocks to invest in are. Here in the UK, reliable news about stocks outside the FTSE indexes (AIM) is hard to come by.
Also consider than there isn't the supply and demand for these stocks in the same way as there is in the main indexes. Even if you were to make a tidy profit over time, you might lose what you made in the delay selling the stock.
Start-ups also have the problem of poor cash reserves so new employees are often given stock options in lieu of cash which further depresses the share price.
I read a report once that said that only 1 in 10 penny shares yields a worthwhile return. I just don't like these odds so I tend to avoid.