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Penny Stock Basics

Description Of Penny Stocks
Penny stock is best described as shares issued by small companies to finance their expansion plans. The definition of penny stocks is shares that trade below $5.00. Prices of penny stocks range from a fraction of a penny to $4.99.

Characteristics Of A Penny Stock

• High Risk/High Reward: Compared to other investments, you have a higher chance of losing your money or getting multiple returns with penny stocks.

• Growth Orientated Small Companies: It’s usually small companies that just issued stocks to finance their aggressive growth plans. An example of such a company is Texas based Dell Corporation. Compared to a corporation such as IBM that has single digit revenue growth, small companies tend to post double digit revenue growth.

• Murky Reputation: When some one mentions penny stocks, one conjures up a boiler room operation where unscrupulous salesmen sell worthless investments. If you have done your research properly to find good penny stocks, the returns could be substantial.

Where Penny Stocks Trade
Penny stocks are traded on various markets. The markets where the penny stocks trade usually denote the quality of the companies themselves. If you’re buying a stake in the company, you want to know what you’re buying. Regulated exchanges require companies to meet their compliance and financial reporting standards. Due to these regulations, you have access to the company’s finances. These exchanges are the NASDQ Small Market Cap, The AMEX, the Canadian Venture Exchange and the Toronto Stock Exchange.

1. NASDQ Small Market Cap: This is the most secure place to invest in penny stocks. The exchange requires companies listed here to meet various compliance and financial reporting standards. Investors will have access to the companies’ financial information. Trading liquidity is good; meaning your order will get filled without difficulty. Shares listed here are usually $1.00 and higher.

2. AMEX American Stock Exchange: Amex is a good place to invest penny stocks. Like the NASDQ Small Market Cap, companies have to meet reporting requirements. Liquidity is not as strong as the NASDQ Small Market Cap though.

3. Canadian Markets: Penny stocks are available in the Canadian Venture Exchange and the Toronto Stock Exchange. Both markets are regulated thus companies will have to file financial reports with the proper exchange. Penny stocks are settled in Canadian dollars. These exchanges have exposure to the currently hot natural resources sector such as energy.

4. OTC-BB (Over The Counter Bulletin Board): The OTC-BB is a regulated quotation service that provides real time trading activity of the stocks listed. The OTC-BB system does have some regulation.

5. OTC (Over The Counter): Penny stocks that trade on the OTC is not under any regulation. These stocks can be bought from a phone salesman or directly from a company. Liquidity is almost non-existent. This means the penny stocks are easy to buy but almost impossible to sell.

6. Pink Sheets: For company shares that do trade without regulation or reporting requirements, they are known as pink sheets. Trading activity is uneven.

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