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What Is A Penny Stock?

Aug 17, 2007
A Penny Stock is a share that trades from a penny to $5. Penny Stock has a large reward prospective with some having gone from a penny to $20 and even more too.

Actually, these stocks commonly refers to any stock trading outside one of the leading major exchanges like the NYSE, NASDAQ, or AMEX, and is often considered to be critical.

In other words, the definition of a Penny Stock is a low-priced, speculative security of a very small company, no matter what of market capitalization or whether it trades on a securitized exchange like the NYSE or NASDAQ or an "over the counter" listing service.

A good example of the OTCBB or Pink Sheets too. The terms Penny Stock, microcap stocks, small caps, and nano caps are also all indeed new and are used interchangeably, however the stock status is determined by share price, not market capitalization or the listing service.

A Penny Stock basically has market caps under $500M and are considered extremely speculative, predominantly those that trade on low volumes over the counter. The Securities and Exchange commission warns that these stocks can trade on the odd occasion, which means that it can be difficult to sell Penny Stock shares once you own them.

Because it can be difficult to realize quotations for a sure Penny Stock, since they can be impossible to be accurately priced. Investors would be equipped for the probability that they can lose their whole investment.

Explaining The Penny Stock More Briefly

Many innovative investors lure to the appeal of these stocks due to the low price and potential for rapid gains which in some cases may be as high as several hundred percent in a few days time span. In the same way, severe drops also occur and many Penny Stocks can drop over 99% trait within the long term.

Therefore, the SEC warns that these stocks are a high-risk investment and investors could be aware of the risks involved. These risks include limited liquidity, lack of financial reporting, and maybe deception too.

Well! In terms of liquidity, since a Penny Stock has fewer shareholders, it is less fluid, meaning that it will not trade as many shares per day as a larger company. Any impulsive change in demand or supply of these stocks can lead to a whole heap of volatility within the stock price.

This lack of liquidity can send a stock price soaring up promptly or also come down rolling. Lack of liquidity and volatility also makes Penny Stock much more vulnerable to manipulation by the concerned management, market makers, or third parties.

A lack of liquidity can also make it extremely difficult to sell a stock, particularly if there is no people that day to trade in to these stocks.

In other words, unlike NASDAQ or the NYSE, there are only minimal listing requirements for a Penny Stock to remain on the splendid OCTBB, namely that they make their filings with the SEC on time.

In fact, companies that fails to meet minimum standards on one of the primary broader exchanges and are depicted and are often realist on the splendid OTCBB or the Pink Sheets.

In addition, Penny Stock trading on the excellent Pink Sheets has little to no regulatory or listing necessities. At least as compared to the major markets. There are no minimum accounting standards, change in notification of ownership of shares, and reported other material changes affecting the financial practicability of a company, all of which are designed to protect the shareholders interests.

These stocks therefore can be new in a number of counterfeit schemes, from pump and dump, short-and-distort, and selling chop stocks. The last being a scam in which shares acquired for pennies are then illegally sold to overseas or domestic retail investors.

Other schemes typical of Penny Stock scams include spam e-mails and junk faxes that tout ridiculous and fraudulent claims, crooked newsletter writers who promote a stock for a fee. Even message boards swarming with "buy now" postings about a Penny Stock from anonymous, paid posters, fake or misleading press releases issued by the company, or reservoir rooms full of cold-callers targeting naive, elderly, or foreign people, all in attempt to drive up the share price while the insiders sell.

While not all Penny Stock that are listed on the splendid Pink Sheets or the OTCBB are fraudulent, one article in a leading magazine estimated that "chop stocks make up to perhaps half the 85 million-share daily volume of the OTC Bulletin Board."

Though some websites continue living and claim to offer unbiased research and recommendations. They will normally charge a nominal fee for access to their websites, and claim not to accept payment or shares to feature a company in their newsletters or say even the websites.

It could be noted for Penny Stock however that not a single conventional financial media outlet, from the Wall Street Journal to the stock listings printed in local newspapers, covers OTCBB or Pink Sheets stocks, apart from the occasional warning tale.
About the Author
William Smith the author provides much more financial information on many subjects as well as the secret to his success in the market along with 5 Free power stock picks emailed daily so grab your Free subscription on his website at Penny Stock (All is Free)
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