Penny stocks are generally defined by The Securities and Exchange Commission as stocks that are trading with a price below $5.00 a share and on one of the over the counter exchanges, either the OTCBB (Over-the-Counter Bulletin Board) or by OTC Markets Group Inc., which include Pink Sheet listed companies.
Most companies listed on the OTCBB are low priced penny stocks, while the OTC Markets Group has several other levels of stock listings for different qualifications, which include the OTCQX and OTCQB, that have higher quality over-the-counter stocks and usually higher stock prices.
The more widely accepted definition of a penny stock is that of a very small company with a share price trading below $1. But whatever definition you choose to go by, it is important to note that note that not all stocks trading at penny stock levels are listed on the over-the-counter exchanges.
Although many penny stocks don’t trade on the major market exchanges like the Nasdaq, there are many large companies, based on their market capitalization, that are trading below $5 per share on the main exchanges. Among other criteria, companies must maintain a minimum closing bid price of only $1.00 per share to remain listed on the Nasdaq Capital Market. The minimum stock price listing for the NYSE is also $1 a share.
Why might this be important? Institutions tend to move in herds, so if one institution invests in a good low priced stock, others might follow, which could quickly turn a penny stock into a higher priced small or mid cap stock. But remember, many penny stocks are trading at a low price for a reason. It is important to do your due diligence when researching and buying penny stocks.
A quick search on the finviz.com free stock screener lists numerous publicly traded companies on the major exchanges with their stock prices currently trading at penny stock levels.
Here are some of the top things you might want to consider when deciding whether or not to invest in penny stocks:
1) Penny Stock Risk vs. Reward
Investing in penny stocks, including over-the-counter penny stocks, is very risky for many reasons, but can also prove to be very rewarding. Some of the risks involved include: market risk - where companies are generally less established and may have questionable financials, and often do not pay dividends, liquidity risk - where it may to difficult to get in or out of a penny stock position because with a potentially small investor base there isn't enough volume of shares trading, and information risk - most penny stock companies have little market awareness because they are not covered by most larger financial institutions.
It is a fact that many small and risky penny stock investments end up losing money, and the company can go out of business. But those that turn out to be winners sometimes return multiples on an initial investment.
2) The Downside is Limited
Another reason to consider buying penny stocks is that the downside is limited. While NO ONE wants to ever lose money, most penny stocks are inexpensive and are trading at under $1.00 a share, so if you buy a stock at 20 cents a share, the worse it could lose is 20 cents. On the flip side, it might be easier for a 20 cent penny stock to go up to $1 a share as oppsed to a $20 a share stock going up to $100.
4) Penny Stocks Can Be Undervalued
Simply, there are plenty of penny stocks that are undervalued. The value of a penny stock can come from the business's intrinsic value - can the business make more money next year than it will this year, and does the company have a good, believable plan to accomplish this?
Some of the things to look for when trying to find penny stocks on the rise might be related to either internal or external news. If a company recently closed a new round of funding near its current stock price, it can lead to a significant boost to its future stock price. But beware if a company raise money at a big discount to the current stock price, it could be a sign that the current stock price is overvalued.
Does the company have positive revenue? Positive earnings, contracts, partnerships, doing things to increase revenue should also be a very good sign for potential future growth.
4) It's Easier to Diversify
When investing in penny stocks, you don't have to risk $10,000 or more to have a diversified portfolio. You can buy a few different penny stocks in separate sectors, instead of buying just one high priced stock in one sector.
Positive News in an Industry can also have a positive effect on individual companies. Even some penny stocks that have less than stellar financials can benefit from positive news in the sector they're in. For example, many marijuana stocks recently exploded in price after many states legalized the herb. Many companies that have never made money saw a drastic increase their stock prices. We've seen similar sector stories with gun manufacturers on potential NRA news, military equipment in times of war, police body camera manufacturers and with other products during times of heated National or political debate.
With a lot of hype involved when investing in penny stocks, it's undoubtedly a very inexact science. That’s why a lot of people say it is just gambling. But if many positive factors can fall in line, you're chances of finding a penny stock success story can be a lot greater than most other people think.
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Disclaimer: Investing in penny stocks is risky. PennyPicks.com and its staff are not registered investment advisers. Information on the website is general in nature and is provided for information purposes only and not intended to be and does not constitute financial or any other advice. Before using the Company’s information to make an investment decision, you should seek the advice of a qualified and registered securities professional and undertake your own due diligence.