What Is a Penny Stock?

A penny stock refers to a small company’s stock that typically trades for less than $5 per share. Although some penny stocks trade on large exchanges such as the New York Stock Exchange (NYSE), most penny stocks trade via over the counter (OTC) transactions. Transactions take place through the electronic OTC Bulletin Board (OTCBB) or through the privately-owned Pink Sheets. There is no trading floor for OTC transactions, and the quotations are also all done electronically.

What are Penny Stocks
A penny stock typically refers to a small company’s stock that trades for less than $5 per share

Penny Stocks Explained

In the past, penny stocks were considered any stocks that traded for less than one dollar per share. The U.S. Securities and Exchange Commission (SEC) has modified the definition to include all shares trading below five dollars. The SEC is an independent federal government agency responsible for protecting investors as they maintain fair and orderly functioning of the securities markets.

KEY TAKEAWAYS

  • A penny stock refers to a small company’s stock that typically trades for less than $5 per share. 
  • Although some penny stocks trade on large exchanges such as the NYSE, most penny stocks trade via over the counter through the OTC Bulletin Board (OTCBB).
  • Penny stocks offer a place for small companies to gain access to public funding.
  • In some cases, penny stocks may provide a method to gain access to larger marketplace listings.
  • With a lower price, penny stocks allow for significant upside in share appreciation.
  • While there can be sizable gains in trading penny stocks, there also can be some risks much like all investing.

How to Trade Penny Stocks

Investors should access and evaluate as much information as they can about a company before buying any stock. This holds true especially for penny stocks issued by the smallest companies in the market. 

The methods of trading penny stocks do not vary widely from trading in higher-valued companies. Just as in traditional stock trading, the goal with penny stocks is to buy low and sell high. The best way to accomplish this is by doing fundamental and technical analysis and getting educated on the companies in which you invest. When considering a potential company to invest in, it’s important to see growth.

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