There is no set, accepted definition of penny stock. Some people define it as stock priced underone dollar, some under five dollars.
Some people include only those securities traded in the “pink sheets”, some include the entire OTC market. The Securities Division considers a stock to be a “penny stock” if it trades at or under $5.00 pershare and trades in either the “pink sheets” or on NASDAQ.
In addition, a true penny stock will have less than $4 million in net tangible assets and will not have a significant operating history. (In other words, if a company has real assets, such as equipment and inventory, and is engaged in some real business, such as manufacturing, then the Division does not consider the stock to be penny stock even though the shares are low-priced.)
Penny stocks are not traded on a stock exchange market but are traded in the over-the-counter (OTC) market. Part of the OTC market is the NASDAQ National Market (NNM) of the NASDAQ National (Association of Securities Dealers Automated Quotation) System, which does not include any penny stocks.
In most securities transactions, your broker-dealer Agen cyacts as your agent, arranging a transaction directly between you and a third party.
In compensation for arranging that trade, you pay your broker-dealer a commission. In some instances, the brokerdealer has the security you seek to purchase in inventory, or wants the security you wish to sell.
The broker-dealer may trade with you on its own behalf, as a principalin the transaction. When the broker-dealer acts as a principal, and not as an agent, the trade confirmation should say that on its face.
The broker-dealer is not paid a commission in principal trades, but makes its money on the spread, and by buying and selling at advantageous times, the same as any other investor.
A sizeable portion of penny stock trades are principal transactions, and an investor should be alert to the potential conflicts of such transactions.
Buying penny stocks online can be very profitable, but you will need a very reliable stockbroker to get the most from these penny shares.
However, before you get started trading penny stocks, you will need to open a trading account. You can do this in one of two ways:
- You can open an offline account, which will require a full service or discount broker
- You can buy and sell penny stocks online, which will still require a deeply discounted broker.
If you find the perfect discount broker, then you will get competitive commission rates and trading facilities online, which is an excellent incentive for signing up with an online broker.
Buying or trading penny stocks online is a good way to get in on the ground floor with a company, particularly if you know that this company is going to be big.
If you know the risks and still want to go for some penny shares, then you are welcome to as you like a risk. But a lot of people will prefer to stay with their shares that are riding high in the NASDAQ, as that is safer for them and they prefer that rather than taking a risk with penny shares.
The risk when buying penny shares is the chance of a high price rise or fall every time that there is the slightest rumor floating around about the company. If there is a rumor about a fall in the company’s quarterly profits, then that could create a big drop in their prices, so proceed with caution.
Despite all of the problems with penny stocks and the millions of dollars of loss involved with them, there are legitimate companies whose securities trade in the pink sheets at very low prices.
Struggling young companies just starting out are perfect examples. Investment in such a company, held through the company’s formative years, can pay off well. Such an astute investment requires three things: the ability to choose the right company, the capital to invest and holdthe investment, and luck.
