Risk of Substantial, Immediate Loss
With penny stocks, the "spread" between the price at which the investor can buy the stock from the brokerage firm ("ask price") and the price at which the investor can sell the stock to the brokerage firm ("bid price") is often very large. At the time the stock is purchased, the investor may suffer a substantial "paper loss" on the investment. For example, if a stock has an ask price of 20 cents and a bid price of 10 cents, the investor would suffer an immediate paper loss of 50%. The bid price of the stock would have to double for the investor to break even.
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