Anyone looking to make money from trading might like the idea of penny stocks. They are different from long-term trading of established companies and can be risky, but also very good investments for smart investors. However, a surprising number of people do not understand the concept of penny stocks and may have the wrong opinion based on the name.
Instead of investing your money in penny stocks without fully understanding what you’re doing, it’s important to understand what they are. In this article, we’ll go through the basics so you can decide if it’s worth spending time researching this unique type of trading.
A Definition for Penny Stocks
Penny shares are the well-known security, which is why it is more officially known as a micro-cap equity. In its simplest terms, it is an economic stock, a stock that trades at a lower value than blue-chip, large-cap items.
In the United States, the SEC describes a micro-cap stock as a stock that trades at a unit value of less than $5.00. This is an official definition, but there are other, more flexible definitions, used by penny traders and stockbrokers, depending on their place in the penny stock market.
If you’re talking to a broker or investor about penny stocks, they may be talking about stocks that are worth less than a fraction of a cent per unit. You may also be taking a look at stocks that are traded on darker markets, capped at $25-$50 million, or less, depending on the definition applied.
In fact, you don’t have to be in the US to talk about penny stocks, as they have parallels all over the world, where stocks and low-cost stocks work, in markets that help your trade. Major penny stocks can become massive name stocks, blue chip stocks, as an organization grows and the markets they trade in may change over time.
Since the definitions used are relatively flexible, in many circumstances you will often find that there are some undiscovered contradictions in the way these actions are defined. For example, you may have stocks that are traded on dark markets, with high unit costs. You may also discover corporations with high market capitalizations, trading at costs well below $5.00 per share.
What markets trade penny stocks?
Penny shares can be traded in a wide variety of markets. Within the United States, this could involve anything from the NYSE and NASDAQ to OTC-BB and Pink Sheets. Penny Stocks are usually found on OTC-BB and Pink Sheets, because the larger exchanges tend to pay attention to companies with higher market capitalization.
Small-cap stocks are generally found where the laws and fees for listing are lowest. Pink Sheets have fewer restrictions than OTC-BBs, so you’ll find them in greater numbers there. You will find that some brokers prefer not to trade Pink Sheets, however you will find many OTC-BB brokers, with a full list of OTC stocks available.
This should be enough to get you started, but keep in mind that trading these stocks will require more reading and implementation if you intend to become an active trader. Of course, there can be many risks involved and you must follow a proven system if you expect it to work.
