Anyone looking to make money by trading may like the idea of penny stocks. They are different from the longer term trading of established companies and can be risky, but also very good investments for intelligent investors. A surprising number of people do not understand the concept of penny stocks though and may have an incorrect opinion based on the name.
Rather than invest your money in penny stocks without fully comprehending what you are doing, it is important to understand what they are. In this article we will look at the basics so that you can decide whether it is worth your time looking into this unique type of trading.
A Definition For Penny Shares
Penny shares are the well known title, for what’s more officially referred to as a micro cap equity. In its simplest terms, it’s an inexpensive stock, a share which trades at a lower worth than blue chip, high cap items.
In the United States the SEC outline a micro cap equity as a share which trades at a unit worth of less than $5.00. This is an official definition, but there are other, looser definitions, which are used by traders and penny stock brokers, depending on their place throughout the penny stock market.
If you’re talking to a broker or investor about penny stocks, they could possibly be speaking about shares where the value, per unit, is lower than a fraction of a cent. You may also be taking a look at stocks that are traded on more obscure markets, with caps of $25-$50 million, or less, depending on the definition applied.
In fact, you don’t have to be in the US, to be speaking about penny shares, as they have parallels, all around the globe, where low cost stocks and shares function, in markets that assist their trade. Top penny shares can go on to be massive name, blue chip stocks, as an organization grows and the markets they trade on can change, over time.
As the definitions used are relatively flexible, in lots of circumstances you’ll often find that there are some contradictions to be discovered, in the way that these shares are defined. For example, you can have shares that trade in obscure markets, with high unit costs. Equally it’s possible you’ll discover corporations with high market caps, trading at costs well beneath $5.00 per share.
What Markets Trade Penny Stocks?
Penny shares may be traded on a wide variety of markets. Within the United States, this could imply anything from the NYSE and NASDAQ to the OTC-BB and Pink Sheets. Penny Stocks usually tend to be discovered on the OTC-BB and Pink Sheets, because the bigger exchanges are inclined to give attention to greater market cap companies.
Small cap shares are typically found where the laws and charges for exchange listing are lower. The Pink Sheets have fewer restrictions than the OTC-BB, so you’ll find them in greatest numbers there. You’ll discover that some brokers favor not to deal with the Pink Sheets, however you’ll find loads of OTC-BB Brokers, with a complete listing of OTC stocks available.
This should be enough to get you started but be aware that trading these shares will take further reading and implementation if you intend to become an active trader. There can of course be a lot of risk involved and you should be following a proven system if you hope to make it work.