Have you ever considered investing in penny stocks? I’m up in the air about them. Once I pay off more of my debt, I may look into them. Penny stocks are low-priced stocks that are traded in over the counter market. Most of the stocks are available in a penny. That’s why they are known as penny stocks. They are also called micro cap. These low priced stocks are highly risky due to various reasons including limited liquidity of these stocks. Even though stocks are traded in the over the counter market, there are situations where they can be traded on other exchanges.
Penny stocks are priced below $5.00 and may be listed on the OTC Bulletin Board or Pink Sheets. The penny stocks are generally offered by a company having less than three years in business and have less than $5 million net tangible assets or a company that has at least three years in business and has under $2 million net tangible assets or a business that has $6 million revenue for three years.
Over The Counter Bulletin Board
OTCBB provider completes info for more than 3000 stocks including real-time quotes display, last sale price and volumes these equities are usually not traded on any national stock exchanges. The OTCBB electronically provide real-time quotes for domestic as well as foreign stocks and ADR’s and also displays previous days trading acting in PPPs.
Pink Sheets
Pink sheets are published and maintained by Pink Sheets LLC. It displayed bid and asked quoting prices of many different stocks. Companies listed in pink sheets are most risky as most of the companies quickly meet the minimum requirement for listing penny stocks. Penny stocks at the pink sheets are thinly traded. Many companies pay traders for selling these penny stocks. Some brokers use fraud activity to sell the shares and evade money from people.
Market Makers
In some of the cases, only a few market makers are actively involved in a specific penny stock and buy and sell these specific securities only. Dealing with a market maker is preferable as the market maker not only sells the particular stocks, but it also buys the stocks. Around 230 market makers are approved by the OTCBB and these market makers buy and sell stocks on a regular basis.
It is also preferable to see that the number of market makers is available for specific stocks. Lower number or market makers can influence or manipulate the specific stocks. In such a case the investment in the specific penny stock is risky as these few market makers can control the prices of the stocks and can keep a wide gap between the sale and buying prices of the stock. In the recent past, some of the market makers were found to involve some fraud activities.
Penny stocks are low-priced shares that are generally traded at over the counter market. Over the counter bulletin boards and pink sheets are common over the counter market, and OTCBB is governed by the rules and regulations of the SEC.
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Penny stocks are definitely an interesting investment opportunity. Where there is lots of questionable promotion to be aware of, if you can find a winning pick with sufficient liquidity the ROI can be impressive!
Great explanation on penny stocks. I would also like to note that many “penny stocks” do trade on the bigger NASDAQ and NYSE exchanges although the definition is murky. Stocks like SIRI that trade below $5 are technically penny stocks even though they sport multi-billion dollar market caps. I would stick to stocks trading on the OTCBB and above and stay as far away from pinks as possible unless the objective is to day trade only.