A penny stock is defined as any stock that is trading for less than one dollar. Some investors customize their definition of penny stock to indicate certain stocks that fall below fifty cents.
Others consider a true penny stock to be a stock worth less than one dollar that’s trading off of a major stock exchange. Again, it all depends on who you ask because officially, it doesn’t matter if the stock is on a major exchange because the defining element is the price of the stock, not where it’s being traded.
Penny stocks are sometimes called differently. Day traders and investors use that term interchangeably with terms such as nano, micro, and small caps. It is usually companies with small capitalization amounts that offer penny stocks.
You can invest in penny stocks with a small initial investment, but you usually have less information to go by when it comes to evaluating the company. Larger companies selling more expensive stocks are required to file reports with SEC.
But even though penny stocks don’t afford you that luxury, it’s a way to get in the ground floor of investing with an up-and-coming company that has limitless potential. If you don’t mind to do a little extra research, penny stocks can payoff quite beautifully.
It is possible for you to find out if a penny stock company has made their financial information available to the public. Doing that is better than just believing someone else when they say a company is worth investing into.
If you find anything unusual, such as the auditors haven’t certified a company’s financial statements, then you should be cautious about trading in that stock. You should also worry if the auditors claim the company has no funds to continue operating.
No minimum standards have to be met by penny stock companies in their listings, since they are done on the OTCBB (OTC bulletin board) and the Pink Sheets.
What is the risk of penny stock investing? Even if the initial investment is fairly low, you have less ability to make decisions based on financial history and potential.