NEW YORK, October12 (FinanceEnquiry.com) - Many investors believe in digging into penny stocks in search of next Microsoft or Wal-Mart, but to begin with they never were penny stocks and it’s a fallacy. Such naïve strategy fails most of the time as successful companies are not born but are made into one and they have to work their way up just like everyone else. The term penny stock has evolved over time, earlier those stocks that traded for less than a dollar per share was branded as penny stocks but SEC changed it to $5. Even though they are trading above a dollar, they are perceived in the same way like that stocks trading under a dollar were perceived in the past: as very risky investments. Penny stocks are emerging companies with limited resources and are high-risk investments with low trading volumes. Such companies make their way in `Pink sheets’ or `Over The Counter Bulletin Board (OTCBB)’. The chances of huge profits are offset by even bigger probability of losses. Risks Associated with Penny Stocks The following are the reason that makes penny stocks riskier than blue chip stocks.

• Microcap stocks or penny stocks lack information, which makes it hard to make investment decision by the public. Furthermore, the information available in the market is not from credible sources unlike stocks listed on NYSE or NASDAQ.
• Stocks are not required to fulfill any standard requirement to get listed on pink sheets or OTCBB. Hence, the quality and credibility of the company is put into question.
• Companies categorized as penny stocks are usually newly formed or approaching bankruptcy. Such companies either have poor track records or incomplete history which makes it difficult for the investor to compare results or to determine a stock’s potential.
• Liquidity is one of the major concerns for an investor, the possibility that one won’t be able to sell the stock at favorable price is always high.
• Manipulation of the stock price is the last and the most important drawback investing in a penny stock. Manipulators buy large quantities of shares to push the price up artificially, and once other investor gets attracted towards it, they sell it at high prices.

It is very hard to determine which companies listed on OTCBB or pink sheets have good prospects, and which are genuinely working hard to be listed on big and reputed indices. Penny stocks are not about being cynical but they are not appropriate to all investors. If an investor is really looking for the next big thing among the penny stocks, then he must make sure extensive and in-depth research is behind his decision.