The idea of hot penny stocks generates a gleam in the eyes of some investors hoping to discover buried treasure and sends others running for the exits. In reality, the best penny stocks dont represent a much greater risk than others. A wise penny stock investor doesnt turn up his nose at small change. Pennies are what turns into dollars.

Though there isnt an established definition, most brokers classify them as any stock that trades below a dollar. There are stocks that fluctuate both above and below that price on a regular basis without being regarded as penny stocks, the difference is that they are traded on the bigger exchanges such as the NYSE and NASDAQ.

A penny stock is more than its price. There are even sub penny stocks. Penny stocks are often shares in smaller companies that have insufficient market capitalization to fall within extensive SEC reporting rules or meet listing requirements for the exchanges. This can mean less reliable information available to the investor to do due diligence.

Usually, penny stocks originate from small businesses that have outgrown private ownership, but need more capital to grow. They appear as micro cap stocks. Not all make it, of course, but some succeed and move onto the big boards of the NYSE or the NASDAQ. Penny stocks can be a great way for an investor to get in at the bottom and rise with a company. Others linger without moving up or down. They arent bad investments, but hardly what one wants for financial growth.

Because penny stocks are traded over the counter (OTC), many brokerage firms charge extra to handle OTC stocks either through a per-share surcharge or through charging a higher commission. Sometimes there are additional document transfer fees to cover the extra paperwork in an OTC trade. Someone wanting to invest in penny stocks needs to pay careful attention to the fine print in their brokerage contract.

If the big exchanges dont list them, how does an investor buy penny stocks? Free penny stock information does exist. There is a daily listing of stocks traded OTC and their prices referred to as the Pink Sheets. These are the pink sheet stocks. Another listing is the OTCBB (Over The Counter Bulletin Board). Investors can find out where to buy, from whom to buy and for how much to buy. They can also look at penny stock forums or subscribe to a penny stock newsletter.

Buying popular penny stocks is a good way to get started in the stock market. For a small investment, investors learn to research, purchase, and sell stocks without making a major financial commitment. They might also discover treasure.

Penny stocks can be a good way for beginning investors to learn how to buy and sell stock and learn the rudiments of investing in the stock market. Investing in penny stocks has been a method for advanced traders to use money they can afford to take more risk with, or as a way for traders to lock their position into place in new or upcoming companies. No matter how you approach it, investing in penny stocks can be a fun and enjoyable way of making money.

What are Penny Stocks?

Penny stocks are low cost stocks that are priced at less than $3 per share. Many companies will make an initial public offering with penny stocks as a way to introduce their stock to the market and gain momentum with investor interest.

Advantages of Penny Stocks

While penny stocks are not for all investors, there are definite advantages to investing in these lower-priced stocks. Beginning investors often do not have the large amount of money required to participate in initial public offerings of better-known companies and penny stocks are a way in which they can participate in new technologies and emerging industry giants.

Another advantage of penny stocks is that they are a way for investors to make money without having to lay down a huge amount of money to join investing in the stock market. Blue chip stocks are often very expensive and those who are new to stock investments simply may not have the thousands of dollars necessary to buy blue chip stocks. Penny stocks give many people the opportunity to engage in investment activities without making a large initial investment.

Disadvantages of Penny Stocks

Probably the largest disadvantage of investing in penny stocks is that they are often an investment in companies that do not have a proven track record and they can be extremely volatile. Investing in a penny stock for a new technology that is introduced by a small emerging company is vastly different from investing in a blue chip stock from a company with a well established product that has been in business for over 100 years. As a result, many people believe that penny stocks can be a high risk investment that does not provide a guaranteed return on your investment.

Another disadvantage of investing in penny stocks is that it often can take a long period of time for a stock to reach its full potential in terms of return on investment and gain in value. Penny stocks offered by solid companies that will grow in the future require patient investment strategies. While it is not unheard of for a penny stock to suddenly take off and have accelerated earning, it is not the norm.

If you are looking for a way to learn about the stock market without making a large investment of money, penny stocks may be the answer to your goal. While they can be risky, investing in penny stocks is an excellent way to get in on the ground floor of a new company or an emerging technology. You can buy and trade penny stocks on the NASDAQ SmallCap Market, AMEX and the Canadian markets (Toronto Stock Exchange and Toronto Venture Exchange).

Penny stocks are common shares of stock from public companies that, in accordance with the Securities and Exchange Commission (SEC), sell for $5.00 or less. More specifically, according to many investing firms and companies, they are only considered penny stocks if they sell for $1.00 or less. Other companies consider penny stocks any stocks that sell shares for less than $3.00. There is no set universal definition that explains what makes a stock a penny stock.

Penny stocks do, however, contain certain requirements that are somewhat more universal. One key detail of penny stocks is that they are traded on over-the-counter (OTC) markets. This means that they are not traded at a physical stock exchange. All trades occur electronically, over the Internet. OTC trades are often completed on over-the-counter-bulletins (OTCB) using pink sheets.

The reason that companies issuing penny stocks are not on major markets is because most of these companies are small companies and new companies. They are unable to meet the requirements it takes to be on a market, such as the NASDAQ or New York Stock Exchange (NYSE). To be considered a small public company, a company must have a small market cap; of less than $15 million. Some public companies do trade on a large market however, but the percentage of these types of stocks traded on a major exchange, is very low.

Companies issuing penny stocks handle almost all trades on the OTC market; which avoids the companies from adhering to federal standards and regulations. This has several effects on the stocks. The first effect is that these companies are extremely hard to analyze. Even if you can get a copy of their financial statements, they might be misleading, manipulated or false. Investors often have no way of determining how the company is doing and must rely on pure speculation. Speculation is closely associated with high-risk investments. Without federal regulations, companies can manipulate financial statements with virtually no recourse.

Another effect is that the trading volume of penny stocks is unusually low, most of the time. When a stock’s trading volume is low, it often leads to a low liquidity. In other words, an investor with penny stocks may have a hard time finding a buyer for his shares of stock, and may end up getting stuck with the shares. Combining the high level of speculation with the low liquidity, many penny stocks have large bid-ask spreads. This is what causes a stock to be volatile. Stocks that are extremely volatile are often considered highly risky investments.

People purchase penny stocks for one primary reason: they are a small investment for investors, allowing almost anyone to be an owner of these types of stock shares. Investors aim for earning a large return on their small investment. If a company sells penny shares, and the company turns out to be a successful, the stockholders can earn huge profits. The problem is that there is a huge risk with all of these small companies that wind up failing. For those companies, the stockholders lose their entire investment. If you decide to purchase penny stocks, always use a trusted, reliable investment firm to handle the transactions for you.