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Although there's no set definition, penny stock is often referred to as low-priced stocks that trade below $5. While penny stocks generally are quoted on the Over-the-Counter Bulletin Board or Pink Sheets, they may also trade on major exchanges such as NASDAQ, NYSE or AMEX. With the recent market downturn, many once prominent companies are now trading as penny stocks.
Many investors are attracted to penny stocks because of their low prices and their ability to yield significant gains if there's buying momentum. As with all investments, great rewards come with great risks. Penny stocks, particularly those that trade on the OTC, often have low liquidity. Thinly traded stocks can go up fast but can also go down just as fast. When trading penny stocks it's important that the stock is highly liquid.
The SEC regards penny stocks as high risk investments and new investors should be aware of the risks involved. There are many great speculative investment opportunities in penny stocks. Make sure you understand the risks, perform proper due diligence and do not invest capital you can not afford to lose.
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