Normally, penny stocks are stocks that hold a face value of $5 or less than that. These low-priced stocks are traded on the Over-The-Counter-Bulletin-Board (OTCBB) and the Pink Sheets because neither the OTCBB nor the Pink Sheets require the same minimum requirements as the NASDAQ or the New York Stock Exchange (NYSE), set by the Securities and Exchange Commission. Penny Stocks are issued, by businesses that are new or close to bankruptcy, as a quick and easy way for these businesses to create quick capital and try to save the business from having to file bankruptcy in a court.

All of the afore said factors like low price, lack of stability and lack of standards make penny stocks the most risky investments for anyone who is interested in playing or trading on the stock market. Many people pursue the buying and selling of these penny stocks, only backed by the lure of the great payoff if a company does succeed even though the fact is that most of these stocks do actually end up in bankruptcy.

These stocks are risky because of the following points.

1. Low or poor liquidity:

As it is low- priced, it has a low value and poor liquidity. And being low valued, it cannot be expected to give out heavy return on investments. And it is equally difficult to interest someone in buying these stocks. It may be required to substantially lower the price of these stocks.

2. Incomplete information about the company:

For those investors who are interested in doing research prior to investing their money, most of the companies issuing penny stocks do not provide enough information about themselves. Because the OTCBB and the Pink Sheets do not have to issue financial statements, the disclosure of all information about the companies is not required.

3. Potential for fraud:

Being sold through spam email or off-shore brokers, these penny stocks due in large part to the lack of regulation that these stocks are not forced to abide by or suffer from. It is not true in every case that these stocks are fraudulent, but there are chances of occurrence of fraud.

Given the growth potential, the opportunity to start with these companies from the very beginning can pay off in the end. You could ride all the way to the top, if you are able to get in on the ground floor with a company that does find success.