Penny stocks are companies which trade with share prices less than or equal to $5. Very often, they will sell for less than $1 and hence the name “penny” stocks. As these stocks are so cheap, they do not require a significant amount of capital to own thousands of shares of. If the share price rises by even a few cents, you can’t stand to see a sizable return. However, the opposite could also happen if the share prices drop by a bit.
While their low price is alluring, it is important to keep in mind the pitfalls of penny stocks. They are highly speculative in nature because of small market capitalization, lack of liquidity, large bid-ask spreads and risk of disclosure. However, if you can manage the risk, they are a great option.
Penny Stock Investing Introduction
Penny stocks do not usually trade on major exchanges like NYSE or Nasdaq. Some do, but others fail to comply with rules such as Nasdaq Rule 5550(a) as they have a bid price less than $1 for primary equities. They are primarily traded through Pink Sheets and over-the-counter bulletin boards (OTCBB). OTCBB has some minimum listing requirements while pink sheets are simply quotation publishers. Pink sheet stocks aren’t subject to listing requirements and are not registered with the SEC. Therefore, OTCBB is more legitimate than Pink Sheets which can be riskier.
How to choose a penny stock broker
To start trading in penny stocks, you need a stock broker. Brokers are a very important part of the equation as they provide the infrastructure for trading and can advise and influence the stock you buy. The first thing to note is a broker’s fee structure. Commissions charged on a per share basis a great for those looking to invest a relatively small amount of money into penny stocks. However, if you plan on being a penny stock trader and buy more shares, it would be better to look for a penny stockbroker who charges a relatively low flat rate for every trade.
Some of the top penny stock brokerages regulated by the government of USA are ChoiceTrade, Charles Schwab Corb, Interactive Brokers, Scottrade, TradeKing, and TDAmeritrade. You can not go wrong with any of these options with some charging a commission per share and others a flat rate. Be careful to avoid scams, though. If something sounds too good to be true, it probably is not. Anything with low costs and high returns is potentially a fraud.
Penny stocks are a risky and speculative option more suited for experienced investors. However, if you can choose a good broker and manage risk effectively, you can stand to make some good profits.