Many people are confused by the exact meaning of penny stocks, particularly in a modern world, where they may cost significantly more than a penny/cent per unit. Also you’ll find that individual definitions vary, from broker to broker and among different investors.
Rather than invest your money in penny stocks without fully comprehending what you are doing, it is important to understand what they are. In this article we will look at the basics so that you can decide whether it is worth your time looking into this unique type of trading.
A Definition For Penny Stocks
Penny shares are the well known name, for what’s more officially referred to as a micro cap equity. In its simplest terms, it’s an inexpensive stock, a share which trades at a lower worth than blue chip, high cap items.
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In the United States the SEC outline a micro cap equity as a share which trades at a unit worth of less than $5.00. That is an official definition, but there are different, looser definitions, which are utilized by traders and penny stock brokers, depending on their place within the penny stock market.
If you are talking to a broker or investor about penny stocks, they may very well be speaking about shares where the worth, per unit, is less than a fraction of a cent. You may also be looking at shares that are traded on more obscure markets, with caps of $25-$50 million, or much less, relying on the definition applied.
In fact, you don’t have to be in the US, to be speaking about penny shares, as they have parallels, all around the world, where cheap stocks and shares operate, in markets that support their trade. Prime penny shares can go on to be large name, blue chip shares, as a company grows and the markets they trade on can change, over time.
As the definitions used are quite flexible, in lots of cases you will often discover that there are some contradictions to be discovered, in the way that these shares are defined. For example, you’ll be able to have shares that trade in obscure markets, with high unit costs. Similarly you could discover firms with high market caps, trading at costs well below $5.00 per share.
What Markets Trade Penny Stocks?
Penny stocks may be traded on all kinds of markets. Within the United States, this could mean something from the NYSE and NASDAQ to the OTC-BB and Pink Sheets. Penny Stocks usually tend to be discovered on the OTC-BB and Pink Sheets, as the larger exchanges tend to concentrate on higher market cap companies.
Small cap shares are usually found where the rules and charges for exchange itemizing are lower. The Pink Sheets have fewer restrictions than the OTC-BB, so you’ll find them in greatest numbers there. You’ll discover that some brokers favor to not deal with the Pink Sheets, but you’ll discover plenty of OTC-BB Brokers, with a complete checklist of OTC stocks available.
This should be enough to get you started but be aware that trading these shares will take further reading and implementation if you intend to become an active trader. There can of course be a lot of risk involved and you should be following a proven system if you hope to make it work.
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