Penny stocks do not have a definite universal definition. Different people have different definitions when it comes to penny stocks. Some people view penny stocks as stocks whose value is less than $1, while others view penny stocks as those priced under $5. Another opinion of penny stocks is that the total value of the company's tangible assets is less than $4 million and there should be no substantial operating history.
According to this definition, companies that have a legitimate business do not come under the category of penny stocks. The Securities Division categorizes penny stocks as those stocks that are valued under $5 and that trade outside the formal stock exchanges.
Penny stocks, in general, trade on the Over The Counter Bulletin Board (OTCBB) and Pink Sheets. In order to trade on formal stock exchanges, there are many regulations that have to be complied with. Most of the penny stocks companies will not meet these regulations.
Thus, they trade on OTCBB and Pink Sheets. The OTCBB and Pink Sheets are electronic quotation systems that display the last transacted value of each penny stock, the volume of trade and the current bid and ask price of each share. Ask price refers to the price at which the seller is willing to sell the share, while the bid price is the price at which the buyer is willing to buy the share.
The OTCBB and Pink Sheets are managed by The National Association of Securities Dealers (NASD). Though NASD also manages NASDAQ, these systems are very different from NASDAQ.
Penny stocks are traded only in the secondary markets. Any company wishing to raise capital enters the stock market through an Initial Public Offering (IPO).
Each and every company has to comply with a set of guidelines issued by the Securities and Exchange Commission (SEC). Companies that do not meet these regulations are not listed. A company's stock becomes a penny stock when its value has fallen below the stipulated amount. The stocks are then moved to the OTCBB and Pink Sheets.
The main difference between companies trading on the OTCBB and Pink Sheets is that companies trading on OTCBB have to follow certain rules and regulations laid down by the SEC, mainly relating to public disclosure of its financial statements, while companies trading on the Pink Sheets do not have to follow any rules. As a result, they do not disclose any information to the public. This is the reason why any kind of information regarding these companies becomes very hard to obtain.
Investors should exercise extreme caution while trading the shares of companies listed on the OTCBB and Pink Sheets. Due to the thin volume of trade, they can easily be manipulated.
This paves way for the possibility of scams and frauds in penny stocks. With extensive research, investors may be able to find hidden gems in these stocks that will prove to be very profitable in the future. But, as a general note of precaution, investors must be wary about fraudsters who inflate the value of the stock. A thorough research will help the investors to choose the right penny stocks.
Penny stocks do not require you to have a big cash outlay to get started. All you need to spend is just a fraction of penny or maybe as much as $5 per stock. These stocks carry tremendous reward potential, but at the same time, they carry more risks than other regular investments. For example, the penny stock may go from 20 cents to as high as 20 dollars or it may just prove worthless with literally no return.
How to Invest in Penny Stocks Making investments in penny stocks is quite easy. Contact a brokerage service and open a brokerage account with them. Your broker will take care of the rest. However, every time you buy or sell a stock, you must pay a small fee to the broker.
How To Avoid Risks With Penny Stocks There are always risks associated with penny stocks. Because of the volatile nature of the shares, you may even lose all your money. However, if you follow a proper strategy, you can certainly minimize the risks.
Remember that penny stocks are low-priced shares, not free. If someone offers to sell penny stocks free of cost, be alert. Two of the sources of such free offers may include an unsolicited email or a free newsletter. In most cases, these are just propaganda.
Only invest in penny stocks that are listed on the premier exchanges.
The higher the volume of the stocks, the safer your investment is. If the volume is, less than twenty thousand shares traded per day, you should understand there is something wrong with the stock.
One of the best ways to avoid risks is to do your own research. Get a feel for the company and analyze how it makes its money. Make sure that the company has a strong business plan and a good profit history. Keep an eye on the trend of improvement
If you cannot do the research on your own, it is always prudent to take the services of a professional stock-picking newsletter. As discussed earlier, a free newsletter cannot be professional and genuine. Therefore, be ready to pay for the newsletter.
Never put all your money into one stock.
More About Penny Stocks Penny stocks are simply the low-priced speculative securities of small companies. The greatest advantage with these stocks is that they can turn your small investment into a fortune. The greatest risk associated with these stocks is their volatile nature. However, if you follow a proper strategy, you can minimize these risks.
Both Nir Dotan & David Gass are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
Nir Dotan has sinced written about articles on various topics from Argentina Travel, Penny Stocks and Pink Sheets. Nir Dotan is a writer and promoter of services, and Prefer. Nir Dotan's top article generates over 74000 views. to your Favourites.
David Gass has sinced written about articles on various topics from Accounting Guide, Finances and Network Marketing. David Gass is President of Business Credit Services, Inc. His company publishes a free weekly e-newsletter on Small Business Consulting at their