Many proponents of penny stocks claim that they are a great way to turn a small amount of capital into huge returns. When you purchase penny stocks you are purchasing inexpensive shares of small companies. These stocks are far less liquid than other kinds of stocks, as they have few stockholders. It is true that they have the potential to produce large returns, but they are also regarded as a high-risk investment.
Due to the low liquidity, they trade occasionally and this means that it could be tough to sell the stock when desired. There is the possibility of losing your entire investment in penny stocks if the small company goes belly-up. For some this is exciting, but for those who like less risky investments this is probably not the right category to pursue. Penny stocks are different from other stocks in how they trade, as they are not listed on the giant exchanges such as the NYSE or NASDAQ. They are traded over the counter, on what is known as the Pink Sheets.