What Are Penny Stocks?

As defined by the U.S. Securities and Exchange Commission, penny stocks are securities issued by small firms, with values lower than $5 per share. Penny stocks aren’t literally worth pennies, although their values are typically pegged at less than a dollar. These equities are traded at the lowest end of the market price range.

Other types of stocks also fall under the definition of penny stocks, including equities of firms that have “microcaps”, or low market capitalizations. These stocks typically have market capitalizations lower than $300 million. You will also find penny stocks from private companies that do not actively engage in trading.

Why Trade Penny Stocks?

Penny stocks are an attractive alternative to other stocks for many reasons. Trading in penny stocks allows investors with modest capitals to purchase high volumes of shares at much lower prices as compared to other stocks. With stock market fluctuations, these stocks show large movements in price, meaning investors could see a significant profit.

In contrast, investors will have to wait for years for the shares in a typical startup to become viable and pay out high dividends. In most cases, investors aren’t even sure when — or if — their investments will pay off. This is why most people trade penny stocks.

Where Are Penny Stocks Usually Traded?

Penny stocks are usually traded on over-the-counter markets (OTCs). OTCs are subject to much fewer regulations as compared to other types of stocks, and trading is generally less formal. Penny stocks are typically traded on off-exchange markets where investors have access to lesser-known securities. Although these securities aren’t available on major exchanges, some of them do have high-profit potential.

Some regular exchanges do offer trading in penny stocks. But investors interested in penny stocks are usually better off with OTCs, which specialize in trading on such stocks on specific platforms. Stocks on these platforms are subject to fewer regulations and reporting rules as compared to stocks that are traded on major exchanges.

Author: Jeff Williams

Jeff Williams is a full-time day trader with over 15 years experience. Thousands of entry-level and experienced traders alike – day-traders and swing-trade small cap stock traders – credit Jeff with guiding them to turning small accounts into big accounts.

Jeff’s "Small Account Challenge" shows people how to transform accounts from a few thousand dollars into $25k, $50k or even $100k.

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