So what are penny stocks and what makes them different from “normal” stocks? They are different in many ways, but one of the main differences is where they are traded. Unlike the “big stocks” that trade on the major exchanges like the New York Stock Exchange (NYSE) and the NASDAQ, penny stocks trade on the a different and completely separate exchange – the OTCBB. This stands for Over The Counter Bulletin Board which is an electronic trading service offered by the National Association of Security Dealers (NASD).
The OTCBB is regulated but it' regulations is nothing like that of the NYSE or the NASDAQ. Companies that can’t meet the very strict criteria demanded by the major exchanges often have to opt for listing on the OTCBB and put a stake in their company up as penny stocks. For many companies looking to go public this is merely a stepping stone to their growth. It can be a trial before they can move on the major exchanges. The sad truth is that most penny stock companies never make it to the big boards.
Penny stock prices are also a huge difference and probably the most obvious difference. They are typically listed at prices between 10c and $2 per stock and they have the symbol “.OB” behind their ticker symbol that identifies them. In recent years many stock on the major exchanges have also became known as penny stocks and many stocks of $5 or less on the New York Stock Exchange and the NASDAQ are now also considered penny stocks.
As a penny stock investment these “penny stocks” on the major exchanges are probably much more secure since they are heavily regulated to protect the investors. Trading penny stocks can be a very risky business, but for those traders with a bit of know-how and persistence the returns are worth it. While a 20% profit would be considered a great investment on the major exchanges, penny stocks can offer profits of 500% and more. If a speculative companies gets noticed, it can shoot through the roof – virtually overnight. This can make you a very handsome profit in a short period of time.
Unfortunately the reverse is also true. If your penny stock company goes bust overnight you stand a chance of losing your entire investment. Stocks on the major exchanges offers some level of security because of the regulation and the large market capital involved. With penny stocks there’s very little security and companies can be wiped out completely – leaving you with nothing to show for your penny stock venture.
When trading penny stocks, weighing the risk and the reward factor is very important. Like all investments, the big reward usually comes with a big risk. To be successful at trading penny stocks, you need to find ways to reduce as much of the risk as possible. The more you can step away from the risks of penny stocks and their volatility, the greater your chances of making good returns with these cheap stocks.
For more information and tips on penny stock trading and how to pick the best penny stocks, check out my daily updates
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