On first glance a penny stock – or a stock whose shares are worth less than $5 – can seem like a good thing. It’s easy to think, “I can buy a bunch of shares of this company, it’s so cheap!” Unfortunately, when it comes to the stock market, a cheap investment isn’t always a good one. While stocks priced under $5 are inexpensive, that low price is often an indicator that a company isn’t doing particularly well.
Okay, but why are they risky?
To explain this, let’s jump into an example:
On Monday, you buy 1,000 shares of Stock A for $0.05 each, amounting to $50 total.
On Tuesday, Stock A’s price goes up to $0.10, making your shares worth $100 total.
On Wednesday, Stock A’s price goes down to $0.01, making your shares worth only $10.
When your investment depends on price movements of only a few cents, your investment is incredibly volatile. If the price increases at all, you can double your money pretty easily. However if the price drops at all, you can lose all of your money just as quickly. Penny stocks can also be highly “illiquid”, meaning that not many shares are being traded on a day to day basis, and you may end up with shares that no one wants to buy. To make matters worse, if a stock’s price drops too low for too long, they can be delisted from the major market exchanges altogether. This means two things:
- That stock will no longer be tradable on Public.
- That stock will be traded on the “Over The Counter Markets” (or just “OTC”), which are not as regulated as the major exchanges and therefore even riskier than trading penny stocks in the first place. Once a stock has been moved to the OTC Markets, it rarely grows into a large company or transitions back to a major exchange.
My stock was delisted – what do I do now?
If a stock you own is delisted from the major markets, don’t worry! Just contact our super friendly support team via chat right in the app and we’ll help sell whatever shares you still have.