Many of you reading have probably heard about penny stocks but the mere name of them scares you because you may have heard that these stocks are speculative and risky. Though they are risky, they are also stocks that can see the biggest gains quickly. Thousands and thousands of traders have made huge profits trading the penny stock market. If you know what you are doing, you too could be one of the many who can reap massive rewards from the penny stock market.
You must understand the penny stock world and get educated about otc stocks before trading them for a living. Not being knowledgeable about the market could be a quick way to lose all your money. There are many websites that can help you learn all about penny stock trading on the internet.
But first, what is a penny stock? The SEC has established that a stock has to trade at $4.00 or $5.00 a share to trade on the larger exchanges. This means that those who fail to meet the $4.00 threshold go on to the penny stock exchange. Once a stock is on the penny stock exchange, it will trade there until it is qualified to trade on a larger exchange.
Other people base penny stocks on the Company’s market capitalization, which is the total value of all shares. For instance, a penny stock that is trading at $1.00 with 3 million shares has a market cap of $3 million.
Now to get an understanding of the profits these stocks can accumulate, take a look at this example. Imagine you have $1,000 and you want to invest it into a stock. You find a stock trading at $100. This means with your $1,000 you can get about 10 shares. If this stock moves from $100 to $101, you will have made about $10 on your investment. If it moves from $100 to $110, you would make $100 on your investment.
Now imagine finding a penny stock for $1.00. Your $1,000 can buy you 1,000 shares. If this $1.00 stock goes to $2.00, you just made $1,000 profit. You doubled your investment. If this $1.00 stock goes to $10.00, you just made $9,000!
The term “penny stock” generally refers to a security issued by a very small company that trades at less than $5 per share. Penny stocks generally are quoted over-the-counter, such as on the OTC Bulletin Board (which is a facility of FINRA) or OTC Link LLC (which is owned by OTC Markets Group, Inc., formerly known as Pink OTC Markets Inc.); penny stocks may, however, also trade on securities exchanges, including foreign securities exchanges. In addition, the definition of penny stock can include the securities of certain private companies with no active trading market.
Penny stocks may trade infrequently, which means that it may be difficult to sell penny stock shares once you own them. Moreover, because it may be difficult to find quotations for certain penny stocks, they may be difficult, or even impossible, to accurately price. For these, and other reasons, penny stocks are generally considered speculative investments. Consequently, investors in penny stocks should be prepared for the possibility that they may lose their whole investment (or an amount in excess of their investment if they purchased penny stocks on margin).
Because of the speculative nature of penny stocks, Congress prohibited broker-dealers from effecting transactions in penny stocks unless they comply with the requirements of Section 15(h) of the Securities Exchange Act of 1934 (“Exchange Act”) and the rules thereunder. These SEC rules provide, among other things, that a broker-dealer must (1) approve the customer for the specific penny stock transaction and receive from the customer a written agreement to the transaction; (2) furnish the customer a disclosure document describing the risks of investing in penny stocks; (3) disclose to the customer the current market quotation, if any, for the penny stock; and (4) disclose to the customer the amount of compensation the firm and its broker will receive for the trade. In addition, after executing the sale, a broker-dealer must send to its customer monthly account statements showing the market value of each penny stock held in the customer’s account.