Penny stocks refer to those stocks in small cap companies that trade over the counter and are also called OTC or micro cap stocks. They are traded outside the major exchanges like NYSE or NASDAQ.

Penny stocks can be highly risky due to the many risks involved with them. These risks are caused by limited liquidity, deficiency of financial reporting, ease of manipulation and scam. Companies give wrong information about their financial reports and other things which later create problem. They also appoint agent to hype their stocks and company information. They send spam emails with guaranteed overnight returns. But the actual thing is investing in these stocks needs very careful planning and dedicated research on behalf of the investor. In the following lines, I have discussed some risk associated with these stocks.
 
No minimum standards. Stocks listed on the pink sheet and the OTCBB do not have to fulfill certain standard minimum requirements to remain on the exchange. Many investors fall a victim for this who deliberately pay attention for the minimum standards for a safety.

Lack of factual information

It is easy to get information of stocks that trade on major exchange. But so far as penny stocks are concerned, it is very hard get true information on them. The information that you get is partial and may be false. The reason is companies that deal in these stocks are listed on pink sheets. They are not liable to file with the Securities and Exchange Commission (SEC). It is the major problem that they are not open to the public for scrutiny. Hence it is very hard to verify the credibility of these stocks.

Lack of significant past record

It is essential for any stock investor to check on the past performance of the stock. But in the case of small or micro cap stocks, the history available is almost insignificant. Besides these stocks are offered by companies approaching bankruptcy or which are new to the market. Consequently, there is a high risk in investing in a stock that has no credible history.

Lack of sufficient liquidity

As you know penny stocks do not sort out ranking stock markets. Instead they have to do with over the counter and are thus referred to as OTC investments. Dealing does not happen recurrently so if a need arises to arrange of the stocks. You find problem in finding buyers for them. And if you cannot sell the stock, you have to lower the prices until you find a suitable buyer.

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