What are Penny Stocks
Penny stocks are typically not listed on the major stock exchanges such as the New York Stock Exchange (NYSE) and the NASDAQ since they do not qualify for their listing requirements. The listing requirements for stocks on the major exchanges must have a minimum amount of shareholders, minimum amount of assets and must file financial reports on a regular basis. They are also being monitored and supervised by the Securities and Exchange Commission (SEC).
Majority of penny stocks are traded on the Over the Counter Bulletin Board (OTCBB). It is an electronic quote system for OTC securities that are not listed with one of the major stock exchanges. Companies are only obligated to file financial reports to the SEC. If they don’t, the company is delisted from the OTCBB listing and the stock can only be traded on the Pink Sheets. The SEC does not supervise or regulate the Pink Sheets activities. Companies that hold less than 10 million dollars in total assets or less than 500 shareholders require no filings to be done.
Due to these reasons penny stocks can be easily manipulated. These stock prices are usually under five dollars and the market capitalizations are very small. Almost all of these companies are very small. Due to the lack of reporting requirements, it can be difficult to verify these companies’ financial situations and outlooks.
A lot of fraudsters take advantage of this and put out deceptive information to influence the stock price. Due to the lack of public awareness and little number of shareholders the trading volume is usually low. This can mean that a small number of buy or sell orders can have great effect on the share price.
The benefits of penny stocks are their low liquidity. A listed stock cannot easily move several hundred percent within a few days, a penny stock can do that effortlessly. The low share price makes it possible to obtain a large quantity of shares with a little amount of money. Small price increases or decreases can have big influence on the performance.
Novice traders are attracted to penny stock fortunes because of the low stock prices and the limited capital requirements. However, penny stocks are more suited for the experienced investors. Penny stocks are very speculative and risky investments. Many companies most likely won’t be successful and go bankrupt. Most shares will probably end up worthless.
A lot of penny stock companies have no or small amount of working capital, assets or are in expansion stage for months or years before any revenues can be anticipated. Just know that you cannot sell your shares for days or weeks or only at a big discount because of the limited liquidity.
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