Getting To Grips With The Basics Of Penny Stock Investing And The Possible Rewards

Posted by Finance Professional on September 12, 2010 under Stock Market News | Be the First to Comment

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.

Here’s a quick, easy burst of information, to help you start to get to grips with penny stocks. Hopefully this will give you some pointers for further exploration and research, rather than a definitive understanding.
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A Definition For Penny Shares

Penny shares are the well known title, for what’s more formally known as a micro cap equity. In its easiest terms, it’s an inexpensive stock, a share which trades at a lower worth than blue chip, high cap items.

Within the United States the SEC define a micro cap equity as a share which trades at a unit worth of less than $5.00. That is an official definition, however there are other, looser definitions, which are used by buyers and penny stock brokers, depending on their place within the penny stock market.

If you’re speaking to a broker or investor about penny stocks, they could possibly be speaking about shares where the value, per unit, is less than a fraction of a cent. You may additionally be taking a look at stocks which can be traded on more obscure markets, with caps of $25-$50 million, or much less, relying on the definition applied.

Of course, you don’t need to be in the US, to be speaking about penny shares, as they have parallels, all around the globe, where cheap stocks and shares function, in markets that support their trade. Top penny stocks can go on to be massive name, blue chip shares, as an organization grows and the markets they trade on can change, over time.
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As the definitions used are quite versatile, in many cases you’ll typically find that there are some contradictions to be found, in the way that these shares are defined. For instance, you can have shares that trade in obscure markets, with high unit costs. Similarly chances are you’ll discover corporations with high market caps, buying and selling at prices well under $5.00 per share.

What Markets Trade Penny Stocks?

Penny shares can be traded on all kinds of markets. Within the United States, this can mean something from the NYSE and NASDAQ to the OTC-BB and Pink Sheets. Penny Stocks are more likely to be found on the OTC-BB and Pink Sheets, because the bigger exchanges are inclined to focus on greater market cap companies.

Small cap shares are usually discovered where the laws and costs for exchange itemizing are lower. The Pink Sheets have fewer restrictions than the OTC-BB, so you’ll discover them in biggest numbers there. You’ll discover that some brokers desire to not deal with the Pink Sheets, but you’ll find loads of OTC-BB Brokers, with a comprehensive record of OTC shares available.
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So that covers the basic elements of penny stock trading. If you want to try this type of trading then you should find a system that suits your trading style. You should not trade penny stocks on a whim as some of these shares can be volatile. But it it this volatility that can prove lucrative to the successful traders out there.