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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