Penny Stock Risks and Regulatory Realities: A Trader’s Primer
Penny stocks—defined by the SEC as equities trading below $5 or outside national exchanges—represent a high-risk segment of the market. These microcap securities often lack the financial disclosures required of larger firms, leaving traders to navigate an opaque landscape of OTC markets and Pink Sheets.
Volatility is the defining feature. With minimal liquidity and erratic price swings, penny stocks can deliver explosive gains or catastrophic losses. The absence of standardized reporting means even basic due diligence becomes a challenge.
Regulators warn that these markets are fertile ground for pump-and-dump schemes. Yet for some, the allure of asymmetric returns outweighs the risks. The key lies in understanding the structural disadvantages: thin order books, wider spreads, and limited institutional participation.
