Exploring Penny Stocks

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Exploring Penny Stocks
What are Penny Stocks?

Low-priced, small-cap stocks are commonly referred to as penny stocks (We'll also refer to them as nano, micro, or small cap stocks). In contrast to their name, penny stocks scarcely cost a penny. The SEC views them to be anything under $5. Even though there are sub $5 stocks trading on large exchanges like NYSE, NASDAQ, and the AMEX, the majority of investors and traders don't consider these when asked to describe the pennies.

Many individual investors and traders glimpse micro stocks like Wall Street's mafia, an untamed world of investing separate from all the glamour and media coverage that happens with stocks that are traded on major exchanges. While the gains and losses can be pretty impressive or destructive in the micro stock world, they're not often heard about elsewhere besides trading options which is more risky in my humble opinion.

Just because you never hear about penny stocks every day on CNBC or The Wall Street Journal, doesn't mean that they aren't without drama. In fact there are many nano stocks that pay third party affiliates to tout terrible companies so they can sell their shares to an unknown investor and sell into them(also known as a pump and dump). Unfortunately, small cap stocks have garnered a reputation as a game filled with scams and corruption due to these ongoing pump and dumps. Indeed, these micro stocks could be your wildest ride, yet only as an investor in a solid company, or a trader who knows his technical analysis.

How to buy those Pennies

Similar to any other stock you would buy, you may purchase shares of a micro stock through your regular stockbroker -- despite whether or not it's listed on a major exchange. Recommended brokers for small cap stocks (Speedtrader, LiteSpeed, Scottrade, Etrade, Capstone, Interactive Brokers, Suretrader) either way, all of them have great execution and cheap commissions.

Even though cheap stocks listed on exchanges like the NYSE and the NASDAQ aren't usually regarded as "penny stocks" per se, they can offer a lot of the benefits of small cap stocks without so much of risk. These exchanges have demanding listing requirements, and while they may not allow for as much of an upside as "true" penny stocks can, they are likely to be more reliable. Often though, micro stocks trade on listing services like OTCBB and Pink Sheets.

Over-the-Counter Bulletin Board, or OTCBB, is a quotation. Unlike Pink Sheets, which is just a quotation publisher, OTCBB retains listing requirements (though they're a lot less stringent than those of an exchange). For this reason, OTCBB has a little bit of added legitimacy.

Pink Sheets is a system that provides investors with quotation information on stocks that are registered with it. Unlike OTCBB, however, Pink Sheets are not registered with the SEC and doesn't enforce any listing requirements. Bottom Line: Pink Sheets stocks are risky as there is a lot of manipulation and scams from insiders and market makers. These also include sub-penny stocks (anything under .01c).

The Potential Payoff

With all the risk involved, why would anyone trader or investor want to put their money in a nano stock anyways? The answer is volatility, and super fast results.

Because penny stocks are prone to violent fluctuation (volatility), many people think that they'll luck out with a stock that will jump from $0.08 to $8 in two weeks. And it's happened especially with sub penny stocks that issue a Press Release. Search through enough investing message boards like Investor Hub and you're sure to find success stories from investors who made a mint while "playing the pennies."

Companies that can successfully create the soar from nano stock to uplisting to a stock on a major exchange are rare, but when you get them they pay out in spades. Finding stocks like this is what creates mega millionaires and early retirements, but it's rare. Numbers fluctuate quite a bit in the penny stock world, but investors and traders have raked in gains of over 1,000% in a couple weeks or even few days time. Penny stocks are the only type of security that has been known to create sometimes overnight millionaires, or wealth on the fast track. The real trick is finding the right stock.

Even with all the risks and drawbacks involved in penny stocks, many investors simply find that the potential windfalls are well worth it. There's a reason that penny stocks remain popular among a brave clique of investors: Penny stocks can deliver a very impressive return.

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