What Are The Basics Of Penny Stocks?

If you are outside of the trading world then it is unlikely that you know fully what penny stocks are. If you speak to different brokers they may give you different answers and you will typically find that they do not cost only a penny, or even pennies to purchase. But they can be lucrative for traders who understand them and know what they are doing.

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.

Defining Penny Stocks

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

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In the United States the SEC outline a micro cap equity as a share which trades at a unit value of lower than $5.00. This is an official definition, but there are other, looser definitions, that are used by investors and penny stock brokers, depending on their place within the penny stock market.

If you are talking to a broker or investor about penny shares, they might be speaking about shares where the value, per unit, is less than a fraction of a cent. You might also be looking at shares which can be traded on more obscure markets, with caps of $25-$50 million, or much less, depending on the definition applied.

In fact, you don’t need to be in the US, to be talking about penny shares, as they have parallels, all around the world, where low-cost stocks and shares function, in markets that assist their trade. Top penny stocks can go on to be big name, blue chip stocks, as a company grows and the markets they trade on can change, over time.

Because the definitions used are somewhat flexible, in lots of cases you will often discover 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. Equally chances are you’ll discover firms with high market caps, trading at prices well beneath $5.00 per share.

What Markets Trade Penny Shares?

Penny stocks may be traded on all kinds of markets. In the United States, this will mean anything from the NYSE and NASDAQ to the OTC-BB and Pink Sheets. Penny Shares are more likely to be found on the OTC-BB and Pink Sheets, as the larger exchanges are inclined to deal with greater market cap companies.

Small cap shares are typically found where the regulations and fees for exchange listing are lower. The Pink Sheets have fewer restrictions than the OTC-BB, so you’ll find them in greatest numbers there. You’ll discover that some brokers favor to not deal with the Pink Sheets, but you’ll find loads of OTC-BB Brokers, with a comprehensive listing of OTC shares available.

I hope this has helped you to understand penny stocks a little more and whether you should invest in them. They are not for all investors but for a certain type of trader they can be perfect.

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What Are The Basics Of Penny Stocks?

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