What Are Dollar Stocks?

Internet promotions for cheap stocks might be a scam.

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Dollar stocks or penny stocks are shares in companies that trade for a very low price. Typically, these are investments that trade for $5 per share or less. While dollar and penny stocks have historically been considered risky investments, they also offer the opportunity for significant profits for investors who choose to speculate in them.

Basics of Dollar Stocks

While a share price of less than $5 is a key determinant of what makes a dollar stock, it isn't the only one. In addition, these stocks are usually traded on over-the-counter, or OTC, markets like the OTC Bulletin Board or OTC Link LLC -- once known as the "pink sheets." Frequently, penny stocks are shares in very small companies or companies whose value has fallen, making them riskier.

Benefits of Dollar Stocks

According to "The Street" website, dollar or penny stocks are like the Wild West. Their prices can swing wildly, which means you could be on the winning end of a company whose share price goes from $1 to $4 in a week or two. Since dollar stocks frequently represent very small companies or companies that have lost a lot of value, they also typically have more room to grow in value than they have to lose value. Shares of a dollar stock that grow to represent shares of a large, successful company can offer significant upside potential, as well. Many of today's largest companies were once dollar stocks.

Risks of Dollar Stocks

Dollar stocks can be very risky. Many are not registered with the Securities and Exchange Commission, which means they aren't under regulatory scrutiny or subject to financial accounting rules. In addition, because they trade infrequently, they can be hard to sell. If you can find a buyer, you might end up having to pay his price, which could be lower than you expect.

Managing Dollar Stock Risks

Generally, dollar stocks are usually best bought with speculative money that you can afford to lose. However, you may also be able to protect yourself from losing that money. Many illegitimate penny stocks are promoted through bulk emails or internet forum postings in an attempt to make the price run up so the original investor can sell at a high price; it's usually wise to avoid such come-ons. In addition, doing research on any dollar stock's financials -- including reading the footnotes to the statements -- can help determine which company is a real one and which one isn't. And doing research to ensure that you're buying a real operating company instead of an empty shell of a company that has no real value may also protect you from a painful loss.

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About the Author

Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.

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