Over the past few years, penny stocks have been receiving poor criticisms. Several stock marketplace gurus claim that investing on these kinds of stock is very risky. Even the Securities and Exchange Commission would ask investors to be extremely cautious in dealing with penny stocks. But what genuinely are penny stocks? Are the risks real or are they just invented by firms trading in major stock exchange markets?
Penny Stocks Defined
Normally, penny stocks are defined as those stocks having a market value of much less than one unit of the local currency. Inside the U.S., this would mean that penny stocks are those that sell for less than a dollar per share. This definition, even so, just isn’t always followed, for it really is not uncommon for one to come across penny stocks that sell up to $5 a share.
To clear things out, the Securities and Exchange Commission have also come up with its own definition of penny stocks. According to the SEC, any stock under $5 is really a penny stock. Again, this definition could not often be followed, as some would set the penny stock cut-off point at $3.
For less complicated identification, one can further define penny stocks as those stocks which are traded outside formal exchanges like the NYSE and Nasdaq. Specifically, these stocks are traded on over the counter (OTC) markets and are quoted on Pink Sheets or on Over the Counter Bulletin Boards (OTCBB).
Penny Stocks and Microcap Stocks
In trading, the terms “penny stock” and “microcap stock” are usually utilized interchangeably. Technically, however, the two are really various inside the sense that they’re defined not using the exact same bases. Whilst penny stocks are classified based on their price, microcap stocks are classified based on their marketplace capitalization.
Microcap stocks are defined as those stocks that are traded by tiny businesses with low or “micro” capitalization, thus the term “microcap”. These capitalizations normally fall under the range of $50 million to $300 million.
Because microcap stocks would generally have the identical characteristics as penny stocks (that is, they’re low priced and traded in low volumes), the two terms are typically utilized interchangeably. Further, microcap stocks are also quoted on Pink Sheets and on the OTCBB.
Organizations That Trade Penny Stocks
A lot of firms trade within the OTC market, despite the fact that these businesses are usually classified in three groups:
* New or modest firms which are unable to meet the initial listing of formal exchanges.
* Companies delisted from main exchanges, typically simply because of failure to meet filing requirements, running into financial troubles, or running into bankruptcy.
* Big firms that basically select the OTC marketplace over main and formal exchange markets.
Risks of Investing in Penny Stocks
Among the three types of businesses that trade within the OTC market, investing on penny stocks traded by the very first two would entail the greatest risk. And while investors could have luck on the last, dealing with them would still necessitate excellent care.
You can find four major factors why investing on penny stocks is risky and these factors lay on the characteristics of penny stocks.
* Lack of Public Info
Details is the key to any successful investment strategy, and without any public data offered, there’s a very diminutive chance of being successful in penny stock investments. Firms listed on Pink Sheets aren’t required to file with the SEC, making penny stocks a great deal harder to scrutinize than the stocks listed on key exchanges.
* No Minimum Standards
Key exchanges like Nasdaq and NYSE have minimum regular requirements that member organizations are compelled to fulfill. These requirements would normally serve as safety cushions for the investors. Pink Sheets do not require the fulfillment of any of these standards, though the OTCBB would require companies to file timely documents with the SEC.
* Lack of History
A lot of penny stock trading organizations are fairly new or approaching bankruptcy and these companies normally have poor track records or maybe none at all. Like the lack of public data, lack of company history makes scrutinizing penny stocks a good deal far more tough.
* Low Level of Liquidity
You will find two reasons why one really should steer clear of stocks with a low level of liquidity. Initial, these stocks are challenging to sell. Second, traders often manipulate the prices of these stocks. Any of the two reasons would spell disadvantage for any investor who buys shares in a penny stock.
Risks are inevitable in any kind of investment but the risks of investing in penny stocks greatly outweighs the risks that one would have to make when investing in major exchange markets. But ought to an investor still choose to invest on these types of securities, he superior be cautious and armed having a lot of details, which is very tough to find, about the business he is trading with.
Online Trading Systems Guide & Trading Systems Review – top, surefire trading system & method for stocks, options, forex, futures and commodities.