Low-priced, small-cap stocks are known as penny stocks. Penny stocks are stocks which have a low value. Penny stocks, also known as cent stocks in some countries, are common shares of small public companies that trade at low prices per share.
Contrary to their name, penny stocks rarely cost a penny. There is no specific price that a penny stock has to be for it labeled a penny stock, however in the UK Penny stocks are often shares with a value between 1p and £1. In the US penny stocks are between 1 cent and $1.
The SEC considers a penny stock to be pretty much anything under $5. And while there are sub $5 stocks trading on big exchanges like NYSE and NASDAQ, most investors don't think of these when asked to describe a penny stock.
The term penny stock does not actually have a strict definition. One of the more common definitions of a penny stock is one which is literally priced in pennies or more specifically with a share price under a dollar. A more common definition however is that a penny stock is any stock which is priced under $5.
Another way that people define whether a company is a penny stock is according to how it is traded. This definition describes penny stocks as being those companies which trade on the over the counter market or the pink sheets. In other words, these are alternates to the traditional stock exchanges such as the NASDAQ or NYSE.
In the United States, the SEC defines a penny stock as a security that trades below $5 per share, is not listed on a national exchange, and fails to meet other specific criteria.[1] In the United Kingdom, stocks priced under £1 are called penny shares. In the case of many penny stocks, low market price inevitably leads to low market capitalization. Such stocks can be highly volatile and subject to manipulation by stock promoters and pump and dump schemes. Such stocks present a high risk for investors, who are often lured by the hope of large and quick profits. Penny stocks in the USA are often traded over-the-counter on the OTC Bulletin Board, or Pink Sheets.[2] In the United States, the Securities and Exchange Commission and the Financial Industry Regulatory Authority (FINRA) have specific rules to define and regulate the sale of penny stocks.
Penny stocks are popular because any increase/decrease in their value results in big profits/losses for the trader.
Example
Most individual investors look at penny stocks like Wall Street's Wild West, an untamed world of investing detached from all the glitz and media coverage that comes with stocks that are traded on major exchanges. While the gains and losses can be pretty impressive in the penny stock world, they're not often heard about elsewhere.
Just because you don't hear about penny stocks every day on CNBC doesn't mean that penny stocks are without drama -- take SCO Group, a software company that brought on the wrath of the world's computer-literati when it made claims to the UNIX operating system. Unfortunately, penny stocks have also garnered a reputation as a game filled with scams and corruption. Indeed, penny stocks could be your wildest ride yet as an investor.
So then, if penny stocks usually aren't traded on normal exchanges, where can you buy them?
Contrary to their name, penny stocks rarely cost a penny. There is no specific price that a penny stock has to be for it labeled a penny stock, however in the UK Penny stocks are often shares with a value between 1p and £1. In the US penny stocks are between 1 cent and $1.
The SEC considers a penny stock to be pretty much anything under $5. And while there are sub $5 stocks trading on big exchanges like NYSE and NASDAQ, most investors don't think of these when asked to describe a penny stock.
The term penny stock does not actually have a strict definition. One of the more common definitions of a penny stock is one which is literally priced in pennies or more specifically with a share price under a dollar. A more common definition however is that a penny stock is any stock which is priced under $5.
Another way that people define whether a company is a penny stock is according to how it is traded. This definition describes penny stocks as being those companies which trade on the over the counter market or the pink sheets. In other words, these are alternates to the traditional stock exchanges such as the NASDAQ or NYSE.
In the United States, the SEC defines a penny stock as a security that trades below $5 per share, is not listed on a national exchange, and fails to meet other specific criteria.[1] In the United Kingdom, stocks priced under £1 are called penny shares. In the case of many penny stocks, low market price inevitably leads to low market capitalization. Such stocks can be highly volatile and subject to manipulation by stock promoters and pump and dump schemes. Such stocks present a high risk for investors, who are often lured by the hope of large and quick profits. Penny stocks in the USA are often traded over-the-counter on the OTC Bulletin Board, or Pink Sheets.[2] In the United States, the Securities and Exchange Commission and the Financial Industry Regulatory Authority (FINRA) have specific rules to define and regulate the sale of penny stocks.
Penny stocks are popular because any increase/decrease in their value results in big profits/losses for the trader.
Example
- a trader invests $10,000 on two different shares, share A @ $40 and share B @$0.75 (penny share).
- share A has a value of $40 and gains 25 cents (0.625% gain) 0.625% of $10,000 = a profit of $62.50
- share B (our penny stock) has a value of 75 cents and gains 25 cents. A 33.33% gain. A 33.33% gain of $10,000 = a profit of $3,333.33!
- penny stocks lack liquidity and you may not be able to get out of a trade when you want to.
- there are schemes with penny stocks whereby someone (crooked Craig), informs everyone (people with little stock market education), to buy a specific penny share (which he already owns), then sells the penny stock after everyone he has informed to buy it, buys it. This means crooked Craig has made his profits whilst potentially leaving other people in a dangerously volatile trade.
- penny stocks can lose you money as fast as they can help you gain it, however this isn’t so much of a down side as this is the case with all investments.
Most individual investors look at penny stocks like Wall Street's Wild West, an untamed world of investing detached from all the glitz and media coverage that comes with stocks that are traded on major exchanges. While the gains and losses can be pretty impressive in the penny stock world, they're not often heard about elsewhere.
Just because you don't hear about penny stocks every day on CNBC doesn't mean that penny stocks are without drama -- take SCO Group, a software company that brought on the wrath of the world's computer-literati when it made claims to the UNIX operating system. Unfortunately, penny stocks have also garnered a reputation as a game filled with scams and corruption. Indeed, penny stocks could be your wildest ride yet as an investor.
So then, if penny stocks usually aren't traded on normal exchanges, where can you buy them?
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