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Penny Stocks do not have to fulfill minimum standard requirements to remain on the exchange. Once a company can no longer maintain its position on one of the major exchanges, the company moves one of these smaller exchanges. While the OTCBB does require companies to file timely documents with the SEC, the Pink Sheets has no such requirement. Minimum standards act as a safety cushion for some investors and as a benchmark for some companies.


Many of the companies considered to be pennystocks are either newly formed or approaching bankruptcy. These companies will generally have a poor track record or none at all. As you can imagine, the lack of histories of companies only magnifies the difficulty in picking the right stock.


Since pennystocks don't have much liquidity, two problems arise: first, there is the possibility that the stock you purchased cannot be sold. If there is a low level of liquidity, it may be hard to find a buyer for a particular stock, and you may be required to lower your price until it is considered attractive by another buyer. Second, low liquidity levels provide opportunities for some traders to manipulate stock prices, which is done in many different ways - the easiest is to buy large amounts of stock, build it up and then sell it after other investors find it attractive.

Many investors speculate on penny stocks because of the low price and potential for quick returns which may be thousands of dollars in a few days. On the other hand, bad losses happen and many pennystocks lose their complete value. Even the SEC warns these are high risk investments. The biggest risks are limited liquidity, lack of financial reports, and fraud.
Pennystocks have less shareholders. Thus, they do not trade as much as a larger companies. Any rapid change in demand or supply of stock can lead to volatility in stock value. Lack of liquiditability usually sends the price up or down quickly. Lack of liquiditability and volatility can makee these investments much more vulnerable to be manipulated by company management, market makers, or third parties. Also this makes it extremely difficult to sell your stock if there are no buyers.

Unlike major stock exchanges, there are only minimal listing requirements needed for a companies stock to be on the OTCBB and companies that do not to meet minimum requirements, then usually one of the broader exchanges are delisted often relist on the OTCBB or the Pink Sheets.
Stocks trading on pink sheets have very little regulations or listing requirements. There are no real minimum accounting standards, change of notification in ownership of shares, and reported other material changes that affect the financial assets of the company. This means there is no protection for the share holder.

Beware of Internet Forums and weblogs, where fraudsters claiming to be investors that have studied facts or act as company insiders. Thus a single person or a small team can create the appearance of a huge interest in a stock simply by creating a huge number of aliases.