Money On the 1’s: Penny Stocks 101

The term "penny stock" usually refers to a security issued by a very small company that trades at less than $5 per share.

Very few things in life are without its risks. Penny stocks, however, falls right into the risk category. What are penny stocks? And, how are they traded? Continue reading for the answers.

A Penny for Your Thoughts

There are many scams out there concerning money, but penny stocks, to some, is not one of them. The term “penny stock” usually refers to a security issued by a small company that trades at less than $5.00 per share. Penny stocks also can include the securities of certain private companies with no active trading market. That’s right, NYSE, NASDAQ and AMEX continuously is being monitored for profitable stocks that are trading.

Know that the lines are blurred when it comes to defining this type of stock; there is no generally accepted definition of a penny stock. According to Investopedia, some consider it to be any stock that trades for pennies or those that trade for under $5.00, while others consider any stock trading off of the major market exchanges as a penny stock. Confusion can arise, too, because there are some large companies, that trade below $5.00 per share, while there are many small companies that trade for $5.00 and up.

How are these stocks quoted? Penny stocks are generally quoted over-the-counter, such as on the OTC Bulletin Board (OTCBB). Penny stocks also may trade on securities exchanges, including foreign securities exchanges. Now, for more on The OTC Bulletin Board. It is an electronic quotation system that displays last-sale prices, real-time quotes and volume information for many over-the-counter securities that are not listed on a national securities exchange. Plus, brokers who subscribe to the system may use the OTCBB to look up prices or enter quotes for OTC securities. Under the OTCBB’s eligibility rule, companies that wish to have their securities quoted on the OTCBB must file current financial reports with the Securities and Exchange Commission (SEC) or with their banking or insurance regulators.

As if all the above wasn’t already enough to digest; penny stocks may trade infrequently, which means that it may be difficult to sell penny stock shares once you own them. What’s more, because it can be somewhat difficult to find quotations for certain penny stocks, they may be difficult or virtually impossible, to accurately price.

What exactly does this mean? Penny stocks are generally considered speculative investments. Therefore, investors in penny stocks must be prepared for the possibility that they may lose their entire investment (or an amount in excess of their investment).

The Magic Formula

The next question in your mind may be what penny stocks are the most profitable. The answer is, there is no easy answer, for the simple fact that what holds true today may not necessarily be the case tomorrow. In layman’s terms, the stock market can fluctuate at a moment’s notice. But, you can better determine if buying and trading stocks is right for you by making an honest assessment about:

  • Your current financial and investment position;
  • Your level of investment experience;
  • Your trading goals;
  • Your risk tolerance;
  • Your expectations of returns.

On the Upswing

There definitely is an upside to purchasing penny stocks, that being you can purchase shares in a company for relatively cheap. The only real way to be successful with penny stocks is to educate yourself as much as you can, about your market.

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-Kimberly Williams

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