A penny stock is defined as any stock that is trading for less than one dollar. Some investors put their own definition into place for penny stocks, such as any stock priced below fifty cents.
Others consider a true penny stock to be a stock worth less than one dollar that’s trading off of a major stock exchange. Again, it all depends on who you ask because officially, it doesn’t matter if the stock is on a major exchange because the defining element is the price of the stock, not where it’s being traded.
Penny stocks sometimes go by different names. Day traders and investors use that term interchangeably with terms such as nano, micro, and small caps. Penny stocks come from companies with a small amount of capitalization, which means the total value of their company stock.
You can invest in penny stocks with a small initial investment, but you usually have less information to go by when it comes to evaluating the company. With a larger company that has stocks trading at more than a dollar, you’re able to access reports filed with the SEC to conduct a review before you invest.
But even though penny stocks don’t afford you that luxury, it’s a way to get in the ground floor of investing with an up-and-coming company that has limitless potential. You may have to do more legwork to do your homework on penny stock companies, but it can pay off in your investments.
If you find a penny stock that you’d like to consider, you want to check to see if the company has made their financial reports available to the public. Don’t just take someone’s word for it that a certain penny stock is worth investing in.
If you find anything unusual, such as the auditors haven’t certified a company’s financial statements, then you should be cautious about trading in that stock. Another red flag is if the auditors have declared that the company may not have enough money to keep operating.
With penny stock investing, there are no minimum standards they have to meet for their listings, since they’re done on the OTCBB (OTC Bulletin Board) and the Pink Sheets.
Where does risk play a factor in penny stock investing? While the cost to trade penny stocks is relatively low, the risk is a bit higher because you don’t have a way to see the history of the company or the stocks and how it factors into your investment strategy.