What Are Penny Stocks

There is actually no accepted definition of what makes a stock a penny stock. To some people it as stock priced under one dollar, to others under five dollars. Some people include only those securities traded in the “pink sheets”, some include the entire OTC market.

The Securities Division considers a stock to be a “penny stock” if it trades at or under $5.00 per share and trades in either the “pink sheets” or on NASDAQ in US.

A penny stock will likely have less than $4 million in net tangible assets and will not have a long operating history.

Penny stocks are not traded on a stock exchange but are traded in the over-the-counter (OTC) market. Part of the OTC market is the NASDAQ National Market (NNM)

There are also non-NNM NASDAQ securities, including some penny stocks. The NASDAQ system has listing standards that change from time to time and, depending on the standards, there may be more or fewer penny stocks on NASDAQ. If you purchase a low-priced security that is listed on NASDAQ, it will meet certain minimum standards. In addition, many NASDAQ prices are quoted regularly in newspapers, allowing you to follow the price of your security instead of forcing you to rely on your broker for all price information.

The third major component of the OTC market is the National Quotation Bureau’s (NQB) service, commonly referred to as the “pink sheets”. The NQB’s securities lists and price information, printed on pads of long, narrow sheets of pink paper, have, for all practical purposes, no meaningful listing standards, and price information is sometimes difficult, if not impossible, for the small investor to obtain.

Broker-dealers obtain their price information by calling the trading desks of three “market makers”. Obviously, small investors do not have access to those traders and must rely on their stockbroker for accurate price information.

Despite the risks inherent in such lack of price information there are some big advantages of investing in a Penny stocks. It can bring large and rapid returns on investment, and the fact that penny stocks are priced low enough for even very small investors to purchase stocks and share the opportunity for a diversified portfolio.

In penny stock trading, a change in the price of the stock of just a few cents can mean a large change in the value of the stock on a percentage basis, which can lead to a large potential return on investment, especially if compared with the usual return on investments with higher valued stocks.

Updated: October 14, 2011 by admin