What are Penny Stocks? | American News

The exact definition of a penny stock varies in the investment world, but any stock trading at $5 per share or less can be considered a penny stock.

Generally, however, the term penny stocks refers to stocks that trade at less than $1 per share and do not trade on a major exchange, such as the New York Stock Exchange or Nasdaq. Penny stocks are also relatively illiquid compared to more expensive stocks listed on major exchanges, making them extremely volatile at times. Penny stocks represent some of the smallest companies in the public market, and many penny stocks trade at prices below 1 cent.

Penny stock trading is widely considered to be one of the most speculative forms of stock market investing. Penny stocks are extremely risky, and many penny stocks represent some of the most nefarious companies in the market, including pump and dump schemes and outright fraud. Any penny stock not listed on a major exchange is not subject to the rigorous financial and accounting standards that these exchanges require for listing, which makes these companies less transparent to investors.

For inexperienced investors, the potential advantage of a stock trading for just pennies per share may seem compelling over a blue chip stocks with a market capitalization of several hundred billion dollars and a stock price above $100. Unfortunately, while there are a handful of hidden gems of penny stocks that have made spectacular long-term investments, some experts estimate that up to 99% of penny stocks ultimately fail.

Given this track record, many penny stock investors focus more on timing short-term trades rather than buying and holding stocks for the sake of it. long term. Since most penny stocks are illiquid, relatively low buying volume can lead to extreme price swings, and it’s common to see some penny stocks gain 100%, 1000%, or even more in a single day.

The NYSE, Nasdaq, and other major international stock exchanges have minimum listing requirements for any company listed on their exchanges. These requirements typically include a minimum share price, minimum market capitalization, and annual listing fees. Since the majority of stock companies are unwilling or unable to meet these requirements, they instead trade on over-the-counter, or OTC, markets.

There are three main OTC Stock Exchanges. The OTCQX is the highest tier OTC marketplace and has the highest financial reporting standards and oversight of its businesses. The OTCQB is the mid-tier OTC market and is often referred to as the “venture capital market” due to its high concentration of developing companies. Finally, the Pink Sheets is the lowest level OTC market and is home to most of the lowest penny stocks that have no reporting requirements and are not even required to register with the Securities and Exchange. United States Commission.

There are several types of OTC stocks, and not all of them are scams or frauds. Many small companies or startups that trade on OTC markets are completely legitimate businesses, but are too small to meet the minimum listing requirements to trade on a larger exchange. Some stocks traded on the over-the-counter market are so-called fallen angels – companies that previously traded on major stock exchanges but were delisted for failing to meet minimum listing requirements.

Often a company will delist its shares from an exchange and have them continue to trade on the OTC market if it is subject to bankruptcy proceedings. Moreover, some foreign companies, such as Volkswagen AG (symbol: VWAGY), Nestlé SA (NSRGY) and Nintendo Co. Ltd. (NTDOY), trade on major stock exchanges in their home country and choose not to list on a major US stock exchange. Instead, these companies have US certificates of deposit, known as ADRs, which trade on over-the-counter markets in the United States and represent shares of their foreign-listed stocks.

The SEC has described pump-and-dump schemes as “one of the most common investment frauds,” and the practice is common among penny stocks, especially those trading on the unregulated Pink Sheets.

The typical illegal pump and dump system begins with a small number of traders or company insiders quietly accumulating a large number of shares of a penny stock. The company then often issues a glowing press release or news headline, usually touting a partnership, progress on a product or innovation, or a new plan for the future. These press releases often contain forward-looking language and few definitive statements or actions on what has already been accomplished.

Buyers then organize groups of other traders to post information on social media, on message boards or in stock pick newsletters, highlighting the stock’s huge upside potential. Once other investors begin to pile into the stock and drive the price up, pump and dump schemers sell their stock for massive gains at the height of market excitement. At this point, the company goes silent once again and the stock price generally falls back to where it was before the scheme began, leaving many investors on the hook.

Penny stock trading is popular for many of the same reasons as the lottery. If you pick the right penny stock ticker on the right day, you could win big by trading penny stocks and get rich overnight. The lifestyle of penny stock traders and pump-and-dump scammers, such as “Wolf of Wall Street” Jordan Belfort, is often depicted in pop culture as lavish and glamorous. But like lottery tickets, penny stocks generally have a very low probability of paying out over the long term. And while pump-and-dump artists can temporarily earn millions of dollars, Belfort and many other penny stock trading schemers are routinely arrested and charged for their crimes.

One of the biggest perks of trading penny stocks is the thrill of chasing a handful of diamonds in the rough among thousands of virtually worthless stocks. This search can be very appealing to people who love DIY projects, as most penny stocks don’t get any media or analyst coverage. If a trader chooses the right penny stock, the gains can be quick and big. Earning large sums of money on an investment that few other people were aware of can give penny stock traders a sense of satisfaction, especially if they enjoy posting their earnings on social media. Finally, most penny stocks are so cheap that even buying thousands of shares won’t break the bank.

Most penny stocks lack strong financial histories, and some have little or no public financial disclosures. While the S&P500 and other large cap stock indices tend to trade higher over the long term, the overwhelming majority of penny stocks trade lower and eventually fail completely. Penny stocks often have low trading volume, low liquidity, and extreme volatility, making it difficult to exit a large position without driving the stock price down significantly. Finally, many penny stocks trade on risky and poorly regulated OTC markets, such as the Pink Sheets, which makes them prone to scams and fraud.

FAQs

No, but many popular online brokers allow trading at least some penny stocks, including E-Trade, TD Ameritrade, and Robinhood.

Some brokers trade stocks commission-free, while others charge additional fees for trading listed stocks.

There is no minimum amount of money needed to start trading penny stocks unless you plan to day trade.

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