The myth has been old and strong – Microsoft Corporation (MSFT) and Wal-Mart Stores Inc. (WMT) were once penny stocks. Jordan Belfort (at least as seen in Martin Scorsese’s movie The Wolf of Wall Street) utters the same myth in order to sell the penny stocks. Jordan Belfort had also said: “As long as it gets done, it doesn’t matter how.” With that belief many traders might trick investors to buy or splurge money on penny stocks, but that might peter out the entire investment.
Before we discuss why investors should stay away from the risky penny stocks, let us take a look at the theory and practice.
What Are Penny Stocks?
According to Investopedia, penny stocks trade at a relatively low price and market capitalization, usually outside of the major market exchanges. These are highly speculative shares being offered by very small companies that hardly have any track record. Generally market capitalization of a penny stock is between $50 and $300 million. Most importantly, low liquidity is a key catachrestic of these stocks.