Market capitalization, also called market cap is a figure which is obtained by multiplying the number of stocks issued by a company by the price of the stocks. This figure is indicative of whether the stocks are penny stocks or not. When the market caps are large, then it is listed by the stock exchange because the company owning the stocks may find it difficult to sell such large volumes of stock through the over the counter method only. You could find some large market caps on the pink listings or the OTCCB, but these listings usually feature stocks which are low in volume as well as in price.
The method of trading using the over the counter route is rare and there are no regulations which govern the trading of such stocks. Stocks which are traded through the stock exchange are always supervised by the SEC, which in a way gives the investor and trader the assurance that the stocks belong to companies of repute and standing. The SEC also takes proper measures to safeguard the interest of the investors as well as ensure that there is adequate transparency in trading practices.
The reason why using the over the counter method in stock trading is risky is because you can never know whether the company has a name or not. There are no regulations which monitor the trading of such methods. The companies which usually sell their stocks through the over the counter method would normally have very low volume of stocks which are priced very low. Another reason why companies choose this method is because this is the first time that they are issuing stocks in the market. Because of the lack of regulation monitoring any of this, investing in penny stocks gets riskier.
There are some other reasons which increase the risk for an investor to invest in penny stocks. You hardly have any information about the company whose stocks you are investing in. this means that if the company sinks or performs badly, all your money will sink simultaneously. Knowing the background of the company you are investing in is important before making any investment.
The other problem with penny stocks is that they are highly speculative. For instance, you might find the right penny stocks in the pink listings. But you will not be able to trade them if the prices go up. This is because penny stocks are not traded very widely. Even when the prices go down, these can be difficult to sell. Here the problem is liquidity. At the end of the day, what happens is that you do not have money when need it most.
All is not gloomy with penny stock investments though. There could be some profits for you, which is good for a low initial investment. Penny stock investments are especially good for beginners who wish to try it out with smaller investments, so that even when there is a loss, it is not disastrous to your pocket and may not drain you completely.
