What Are Penny Stocks

If you're asking yourself "What are Penny Stocks?", which you very well may be since you're reading this, you're taking a step in the right direction by deciding to "learn" about what you may be getting into.

Many people begin trading low-priced stocks without learning about them first and finding out that there are differences as compared to trading and investing in higher priced stocks.

The definition of Penny Stocks can vary based on what you are reading and whom you are speaking with. I'll go over some of them below.

According the the U.S. Securities and Exchange Commission: The term "penny stock" generally refers to low-priced (below $5), speculative securities of very small companies.. (See reference here:)

Other sources use different upper price limits such as $10.00 or less or $1.00 or less, but a good guideline is to use the SEC description mentioned above to gte started.

Besides price limits, these types of stocks generally trade on the OTCBB (Over-the-Counter Bulletin Board) and/or Pink Sheets as compared to the major exchanges such as the NYSE (New York Stock Exchange) or the NASDAQ.

Listing requirements on the major exchanges are more stringent and include minimum requirements in area's such as: earnings, number of outstanding shares and a minimum total value of outstanding shares.

What are Penny Stocks listing requirements? In contrast to abve, Penny Stocks can get by with little listing requirements and in the case of Pink Sheet stocks, little to no reporting requirements as well. Various levels of Penny Stocks are based on the levels of Disclosure within each level.

Of major importance to anyone trading Penny Stocks is the fact that they are thinly traded in many cases. This means that once you enter a new position in one of these low-priced stocks, it may be difficult to get out. As an example, if you buy 5000 shares of stock "XYZ" at $2.00 per share, prices start moving lower and you decide you want to exit your position as prices dip below $1.80. Since XYZ is thinly traded, by the time you enter your order to sell 5000 shares for $1.75, nobody is interested in buying them at that price. Other traders (and market manipulators...I mean market makers) will see your order and could enter a ridiculously low BID at say $1.50, or lower. As your order just sits there, you get anxious and wind up selling at $1.50 because there are no others interested buyers to be found.

In comparison, a widely traded stock will typcially have plenty of interested buyers and sellers which keeps the price spread fairly close in most cases.

There's plenty more to learn when asking yourself "what are Penny Stocks", so keep studying until you feel comfortable before making any final financial decisions to be on the safe side. You're worth it!




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