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What are Penny Stocks?


Penny stocks are usually not listed at the major stock exchanges like the NYSE or the NASDAQ because they don't meet the requirements to list. Stocks that are listed must have a minimum number of shareholders, minimum assets and file financial reports regularly. Big board NYSE and NASDAQ stocks undergo strong supervision from the SEC, (Securities and Exchange Commission).

For the most part penny stocks are usually traded on the OTCBB or on the Pink Sheets. The OTCBB (OTC Bulletin Board) is an electronic system for over-the-counter securities (stocks) that are not listed with one of the big board stock exchanges. The main requirement is that the companies file financial reports to the SEC. If not, the company will be removed from the OTCBB listing and the stock will be pushed to the Pink Sheets. The Pink Sheets activities are truly not supervised or regulated by the SEC, regardless of what they might want you to believe. SEC only gets involved with the Pink Sheets when one of their buddies call in for a favor (This will be discussed in a separate post).

If the company has less than $10 million in total assets or less than 500 shareholders in total then no filings must be completed.

Penny stocks are wide open to scams and manipulation. The stock price is usually far below $2 and market capitalization is very small. The lack of reporting requirements can make it difficult to find verified information about the company, its finances and their future outlook. When I’m trading the OTC Pink Sheets I’m looking at everything as a scam. Once I start to show gains of 20% I start to sell off shares until I at least cover my initial buy in.  Then I am holding free shares to see where it might take me.

Many fraudsters (SCAM Master CEO’s) take advantage of this and publish misleading information to manipulate the stock price. Because of the lack of public interest and low number of shareholders the trading volume is generally low. This means that it doesn’t take many OTC traders to place buy or sell orders to have dramatic effect on the share price.

In my eyes the low liquidity is the biggest advantage of penny or micro-cap stocks. A big board listed stock almost never moves several hundred percent within a few days, whereas a penny stock can do that easily. 100 percent gainers happen daily trading the OTC Pink Sheets. The low stock price makes it very easy to acquire a large amount of shares with a small amount of cash.

The low stock prices and limited capital requirements often attract very novice traders but penny stocks are definitely a playing field for experienced investors only in my mind. Penny stocks are very high risk trades. Many companies won't probably succeed and go bankrupt. The shares will end up worthless.

Many penny stock companies have zero to limited working capital, assets or are in the developmental stages for years before any revenues can be expected. Trading penny stocks is a daily task, you cannot just buy and walk away.

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17 comments:

  1. Very informative. I was considering getting into penny stocks but I had heard it requires a consistent effort and a long wait to actually make anything from. This basically confirms that. I'm not sure if it is true or not but it seems to be a go-to stock option for retired people as they have more time to invest in such ventures. I'll continue to browse around. I have been looking for some stock education and free stock courses to further my knowledge before diving into anything.

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    1. I would have to agree with you James. I really enjoy playing the Penny Stock, but you truly need to be able to watch the L2 the entire time you're in one.

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    2. You are 100% right on that James.

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  2. Your article about penny stocks is great. I didn't realize that people can use them in order to scam people out of money. I'll be on the lookout next time I invest.

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    1. Scamming investors on OTC Penny Stocks happens all the time. I try my best to educate others on the TRUTH.

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  3. Very easy way to explain such a complex topic, great article. Indeed penny stocks has many advantages, like a lower risk of moves, investment and such, right?, but also risk of scams. I think every movement needs to be done after a good research! So, these penny stocks will require more time management to observe a change and get a big difference, is that right? I mean, is not something you will trade after few days, or even weeks? Thank you!

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    1. You are 100% correct Al when it comes to time management. When trading the OTC you must make the time to watch the stocks. At any moment there could be a drastic change.

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  4. Sounds difficult to avoid bad information from fraudsters that post misleading information, don't you think? is there a way to be 100 % sure of the information? Great article, looking forward to learn more from you.

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  5. This is one of the best informative articles i have read on Penny Stocks in awhile. Thanks for sharing.

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  6. The Pink Sheets sounds extremely sketchy. Why do they continue to let it be a thing if the companies seem to already have issues following rules?

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  7. Great information in this article. Everyone should be careful about penny stocks as they may be inflated to reach a certain amount even though there is no actual backing by any sort of proof. People try to manipulate the public in order to buy certain penny stocks. Be warned.

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  8. When it comes to Penny Stocks, you must make sure you research everything you read. This will save you tons of money in the long run. You can always reach out if you have any questions. We are always here to help and educate for FREE.

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  9. Yes penny stocks will take a bit of time to actually see a difference in your money account, but is a safe option to start, and also as you said, you can avoid some extra charges! Great information, thank you for telling the truth and for teaching me!

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  10. Love it, very informative, definitely sending this to my friends, there is so much missinformation about penny stocks!!! Great job!

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  11. Lots of risk and reward with Penny stocks. Before investing make sure that you know what stock you're trading. Also make sure that the company is well respected and has a decent volume with it.

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