What Are Penny Stocks?
Penny stocks can be used as a catch-all term for several types of speculative stock investments, but most commonly, it refers to small public companies trading for less than $5 per share. Penny stocks are typically not listed on US stock exchanges like the NYSE or NASDAQ. Instead, they’re traded through a different method called over the counter, which is why they’re also called OTC stocks. Not all OTC stocks are under $5 per share.
Some traders are drawn to penny stocks because their low price means they can buy a lot of shares and profit from small changes in the stock price. However, high volatility and frequent fraud can make investing in penny stocks and similar speculative securities very risky.
It’s important to understand some technical terms. The term “penny stocks” is often used interchangeably with micro caps, OTC stocks, pink sheets, and gray sheets. But the securities industry uses each term in distinct ways. A micro-cap stock is generally considered any stock with a market cap of $50 million to $300 million. However, not all micro caps are penny stocks.
OTC, or over-the-counter, stocks include all stocks that are not traded on a US stock exchange. Instead, they trade through dealer-to-dealer networks. There are two systems that provide OTC stock price quotes to broker-dealers: OTC Bulletin Board, or OTC BB, and the OTC link, which used to be known as pink sheets. Most penny stocks and micro caps do trade over the counter, but not all OTC stocks are small. OTC stocks can be big or small, foreign or domestic, or can deal in products that are considered illegitimate in some places like marijuana stocks.
What OTC stocks have in common is not having the same reporting requirements as stocks traded on major exchanges. Many OTC companies offer little information for public analysis and stock analysts rarely cover them. Without this data, it can be difficult to know which companies may have a weak business track record or be on the brink of bankruptcy.
These risks are compounded by low liquidity, which may make it difficult for traders to get orders filled near their desired price or filled at all. With low liquidity, large orders can easily move the price. In the case of stocks under $5, a move of a few cents can mean a major percentage gain or loss, illustrating the tremendous volatility.
This lack of information and liquidity make penny stocks and similar speculative securities particularly vulnerable to fraud. However, some investors are trying to get in on the ground floor of companies that may be ready to break out and grow. Others see low prices as a way to buy a lot of shares and profit from small changes in the stock price. For these reasons, trading in OTC stocks remains popular.
Once you get to that stage and are profitable for a month or two, then you can add more money. When you’re starting out, have the mindset and understanding that this is going to take time. This is not going to happen overnight. It’s a game of constant learning and improving.
Moreover, there are different types of these micro stocks, and we can divide them into four tiers. Tier one is related to the biggest market and trading options like New York Exchange or NASDAQ. In most cases, their price is under $5. When it comes to lower tiers, their price is up to $1. Also, tier 4 has the lowest price, which can be lower than 0.001 cents.
If you are interested in finding the penny stock with the best potential, there are some important factors to learn about. One of the main is to look for those companies that are making a profit. You might find some extremely cheap options, but they might be shared by those options that have negative financial trends. Also, look for those options that are growing, and which main strategy is to become a part of some bigger exchange.
It can be difficult to find these affordable options. You should focus on those with the potential to grow over time, and where' the company has a clear strategy to become a part of main trading flows. The main challenge is to determine the right choice since most people who own these shares will keep them and wait for the company to progress.
When it comes to methods that you can use to locate the options that have the best potential, some of the best is to search the reliable sources and news about this market, check the volume and amount of shares, along with current trends related to sales for particular penny stock.
Furthermore, proper analysis is one of the most important parts of trading. It is necessary to consider all kinds of factors before investing. First of all, check out the situation in a particular company, such as annual income, possible debts, the prosperity of strategies, legal issues, collaborations, and more. Also, pay attention to the statistics and charts that show the performances of some options on the market.
It is common for shares to follow similar trends in price changes. Therefore, if you notice a sudden price drop, and then the increased fluctuation, the chances are great that it will start to grow. It is crucial to inspect various elements of some share and try to determine the best option when it starts to lose value. This is one of the best methods to secure profit over time. The demand and supply have a huge influence on the value, and making actions at the right moment can be the only way to gain profit.
Since the risks of trading on this market could be very high, we suggest you learn more about different exchanges and choose only the most reliable ones. Some of the best ones are OTCQX, while you will have increased risks if you select options that are part of Pink Sheet. Moreover, make sure to rely only on reliable sources. It is not a rare case that some people might promote some cheap shares as the next big thing, while they don’t have any potential at all.