The SEC defines a penny stock as a security that is low
priced and speculative that is traded in places such as the OTCBB and Pink
Sheets. Its not so important if a stock is traded on a major exchange or not
since what really makes a penny stock what it is, is the price and not
necessarily the exchange which it is traded on.
Its anybodys interpretation
what exactly is a penny stock since there is no standard figure. Its generally
accepted that its anything trading under a dollar. Go figure right. The biggest
money to be made in these stocks is in conjunction with any news released about
the stock since penny stocks are quite sensitive. Because they are so
sensitive, small investors have the advantage.
There is a right way and a wrong way to play these cheap stocks. The thing to
keep in mind is that any movement in the stock in general is amplified
exponentially in penny stocks. So if the market goes up then penny stocks go up
even more. If the market is down then penny stocks are way down. This is a
generalization of course but an accurate one. Trading of penny stocks is
influenced by the market demand in the OTC rather than the traditional stock
exchange processes.
Penny stocks are bought and sold at a number of different prices. This is
definitely different than normal trading prices you may be used to. This can
become a headache to keep up with if you are doing some online trading and
trying to buy and sell at just the right time. That is why its always a good
idea to set limits so that you dont unwittingly get burned during a transaction
that was in process while prices were changing.
Penny stocks are not always as transparent as small caps are. Penny stocks do
not have to abide by SEC reporting rules and so the frequency of financial
statements may be erratic or nonexistent. Sometimes it seems the only thing
that penny stocks are releasing is press releases to generate some stock market
excitement.
The purpose of this article was not to turn you off of investing in penny
stocks but simply to highlight the differences in trading and level of risk.
Penny stocks will continue to present some exciting investment opportunities
and attract those with a high risk tolerance. As always never invest more than
you can lose and diversify your portfolio.
