What Is A Penny Stock?

Before Investing In Penny Stocks You Should Understand What They Are

Buying penny stocks isn’t like picking up shares of blue-chip companies. Even though they’re both equities, these cheap stocks carry much more risk.  For starters, these companies are much smaller than some of the well-established NYSE or NASDAQ companies. With this said, investing in penny stocks shouldn’t be taken lightly. No matter how low the price is, identifying the best penny stocks to buy takes skill and focus.

We’re not talking about the lottery here. Like all stocks, these are investments. Though the draw of “penny stocks” stems from the huge gains that can be made, many investors still treat them like a less important investment option.
Based on that, many of these same investors end up getting burned.  Initially, penny stocks began as those trading for under $1 per share. This has further evolved to define penny stocks as those trading for less than $5 a share according to the SEC.

What Is A Penny Stock: The Companies Behind Them

Most of the companies behind penny stocks are speculative in nature. It isn’t unlikely to see some of the trading with little to no revenue, higher levels of debt, and slow-moving operations. Furthermore, because of the higher costs for listing on a major exchange, many penny stocks trade Over The Counter.
These are known simply as OTC penny stocks. Though some penny stocks trade on the NYSE and NASDAQ, they are required to have a bid price of at least $1 or $4 depending on the exchange. These companies choose to list Over The Counter because the OTC requires less as far as filing fees.
It costs less to be an OTC penny stock versus a NASDAQ penny stock or one listed on the NYSE. Based on this fact, certain penny stocks can pose even more risk than others.

What Is A Penny Stock: Finding Public Information

Taking into account, penny stocks trading on the OTC, it’s important to be able to find as much information as possible. This is based on the fact that these stocks tend to see the highest risk of manipulation. If you get an email on a given penny stock saying how great it is, that’s considered penny stock promotion. It’s ok to get that information but it’s also important to do your own research before deciding to buy penny stocks like this.

OTC stocks aren’t subject to the same rules as larger stocks. Because of this, many companies will report the minimum amount of information. So it’s important as an investor to understand this and account for it.  Furthermore, many companies have a relatively shorter history of existence. So they will have a short history to take into consideration. 

What Is A Penny Stock: Liquidity

Penny stocks usually have less liquidity than larger companies. This means that these stocks trade less dollar volume per day than blue chips. Based on this, investors of penny stocks may be forced to offer shares at lower prices in order to attract buyers.

This is key to finding the best penny stocks to buy. Pay close attention to the average daily liquidity. This is in comparison to simply looking at the volume on a single day. Penny stocks can breakout big one day and are completely quiet the next. So, finding active penny stocks to buy is important.
The one day pops are great if you can profit quickly. But they usually are associated with promotions. Since these penny stock promotions can be fleeting, holding for longer than a day can be extremely risky.  However, if you find a penny stock that has real news, complete financials, and no apparent promotion, it may be one to add to your list of penny stocks. 

Ready To Make Money With Penny Stocks?

While there’s plenty of money to be made with penny stocks, you need to be able to handle the risks involved. Doing complete research is one way to avoid higher-risk stocks. Even though some stocks may “look good” on the surface, it may be more difficult to sell these when it comes to taking your profit.

Check out our article: How To Make Money With Penny Stocks for more on penny stocks.

* This article was originally published here