According to the SEC, and penny stock is a publically traded stock valued at under $5 per share. Many penny stocks on the market are priced under $1.00, and some are priced under a dime. Penny stocks are not traded on the normal exchanges. Even though you might see stocks valued at under $5 per share trading on the major markets, these stocks would not qualify as penny stocks, which are not traded on the normal exchanges.
This class of stock was originally referred to as “pink sheets” because they were traded on pink paper, before the digital age. So, many times you will hear these stocks referred to as “pink sheets”. Penny stock companies are usually smaller, unknown companies that don’t have the capitalization of larger companies. Penny stocks are risky, and the penny stock market is a volatile one. However, a volatile market can many times represent opportunities for big gains. While some investors are leery and avoid these stocks all-together, others are drawn to them due to their low price and the opportunity for huge returns.
Penny stocks can fluctuate rapidly. In this market, a stock can hump from a few cents per share to single or double-digit dollars per share in just a few weeks. Investors have reported gains of over 1,000% in this time period. At the same time, a stock can lose much of its value in a very short period of time, or not move at all for months and months.
Why are penny stocks so volatile? The main reason is transparency and reporting. Penny stock companies don’t have the same reporting standards with the SEC as a company listed on a stock exchange. Although the companies do have to produce SEC filings, the information reported is not as stringent as what an exchange traded company would have to disclose. The other reason is liquidity. The liquidity of a stock is determined by its trading volume. If a stock can be traded easily, and if it has a high level of trading activity, is is considered to be “liquid”. An investor would potentially like to be able to “liquidate”, or sell the stock for cash, and quickly if needed. However, penny stocks generally have lower trading volumes and investors can end up with stocks they can’t get rid of.
Due to transparency and reporting standards, this opens the door to scammers, dishonesty, and fraud when it comes to penny stocks. Even companies that are delinquent with their SEC filings can still have access to individual investors through other means. However, investors willing to put in the time to research penny stocks and do their due diligence can reap big rewards.
There are two main sources of information when it comes to penny stocks: otcbb.com and otcmarkets.com. Otcbb.com is a bulletin board of information for penny stocks quotes. This company is operated by FINRA. You can’t buy stocks or trade directly with a bulletin board, but you can get stock quotations if you subscribe to the email list. You can get filing information, trade halts, and other stock information on the website. OTCmarkets.com provides quotes and other information about these companies. Our favorite tool for due diligence is the stock screener page. Here you can find out where the company is located, the stock price, percentage of change, trading volume, and security type.
To buy and sell penny stocks, you do need to open a brokerage account. The SEC requires brokers to provide investors with a disclosure about trading penny stocks. Almost anyone can trade penny stocks since you don’t need a lot of money to get started.
Even though there are risks associated with trading penny stocks, many investors that enjoy playing in this market, because the returns can be exceptional.