Penny Stocks

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Stocks are generally categorized according to their market capitalization and price value by the market players. Accordingly, we hear terms like large cap stocks, medium cap stocks and small cap stocks. Shares with very small market cap (up to $100 million) and a maximum price value of up to $ 3 are called penny stocks in the market jargon. These are usually cited as the opposite of blue chip shares, which often carry a premium tag. Penny stocks are usually traded over the counter (OTC) by the brokers because they are unable to list on exchanges due to their stringent norms.

For one thing, big exchanges like the New York Stock Exchange (NYSE) and NASDAQ prefer top-of-the – line companies for listing. More so because they too are keen to feed on reputation of the companies they trade in just as the latter want to cash in on huge turnover volumes of these exchanges. Second, they also strictly enforce compliance of their norms by the listed companies, meaning that those who fail to do so are automatically de-listed. Such exchanges tend to evaluate performance record and caliber of top management of the company applying to list with them.

In contrast, penny stocks are mainly unlisted and traded outside exchanges. In other words, they are nondescript stocks with listless trading. Penny stocks mostly change hands between brokers, without getting much notice from common investors. This is because this category of stocks is supposed to be risky due to lack of key information on the concerned companies, their promoters and management. Perhaps this is the reason why these stocks are so often targeted by investment scammers.

Nevertheless, penny stocks can also turn in unexpectedly big returns if they rise on the fundamentals of the concerned company rather than any market manipulation. This is because most of the penny stocks are generally quite undervalued due to lack of market support. So, anyone who can lay his hands on the right penny stocks might reap unexpected gains some day.

Penny stock aspirants need not worry too much over how they can get started. For the procedure required to be followed in the case of penny stocks is similar to those applicable to other stocks. In other words, you have to open a brokerage account. However, actual trading in the penny stocks is not as simple as in the case of (for example) blue chip shares, because the market intelligence required to make the right investment decision is not easily available. You have to collate this information from different sources using your individual effort.

However, if you have a broker, you job is half done. The broker can provide enough information for you to get initiated into penny stock trading. Further, you can also get insight from your broker into possible market trends in the near, short and long term. In addition, your broker can also advise you on when to buy a penny stock and when to sell that. These brokers know your specific requirement and accordingly give suggestions on investment matters. Moreover, they are always there to help you out with their expert opinion. You broker will charge a specific commission on every transaction that you make using his account. The broker may additionally charge for the advice provided to you.

Alternatively, you can also look up the details on penny stock bids and quotes yourself. These are published in the pink sheets and over-the-counter bulletin board (OTCBB) on a daily basis. In addition, key details on the traded companies can also be obtained from the same sources. Earlier, these details would not be available as the traded companies were not obligated under law to share these details. However, subsequent rules framed by the national association of stock brokers (NASB) require sharing of key details on the listed companies. In addition, some penny stocks are also listed on the NASDAQ and AMEX and hence their price movement can be easily tracked.

Many news letters are also published by brokers to provide information on trading of penny stocks. You can also pore into such new letters to collate the required information besides tips. You can tap this source to collate the required information, without spending too much money. But all said, there is nor sure-fire way to gain success in penny stock trading. You have to tap into informal sources as well to gain sufficient insight into the complexity of the markets. Further, you should also be able to come out with an analytical thinking to make a success of penny stock trading.