What is Penny Stock Trading?
Penny Stock Trading is the buying and selling of low-value stock in small public companies.
Individuals, brokers, and investment firms may engage in Penny Stock Trading.
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The value of the shares being bought and sold is not necessarily a penny.
How Regulations Define Penny Stocks
The U.S. Securities and Exchange Commission defines penny stocks as unlisted stocks with a value of less than $5 per share.
In the UK, “penny shares” are defined as shares that have a value of less than £1.
Although some US investors consider any stock which is trading at less than $5 to be a penny stock, stocks listed in a major exchange are technically exempt from penny stock status, regardless of the current value of shares.
How is Penny Stock Trading done?
Penny Stock Trading is considered Over-The-Counter (OTC) trading. Unlike listed stocks, Penny Stock Trading does not involved fixed or constant rates. Sellers set an ask price on their stocks, and buyers place bids.
The majority of Penny Stock Trading takes place through online brokers such as E-Trade, Charles Schwab or TradeKing. Investors open an account and trade penny stocks directly, while brokers levy a fee on each trade.
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What are the Pros and Cons of Penny Stock Trading?
Penny Stock Trading is attractive to many investors because of its high-risk, high-reward nature.
Since shares are inexpensive, investors can acquire large amounts of stock. If the company does well, the investor can make substantial gains.
The downside is that penny stock companies are generally new and unestablished companies, and have no record of financial success. They can also be established companies that are facing financial difficulties.
Such companies can easily go bankrupt, rendering the stock worthless.
Another problem with Penny Stock Trading is the presence of scam-artists and pump-and-dump schemes.
Penny stock promoters are notorious for unethical tactics and false claims.
In some extreme cases, penny stock companies have been shown to have few or no assets related to the market in which they operate.
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