Many people absolutely love penny stocks, but other people avoid them like the plague. Whether you will be attracted to penny stocks will depend on your individual investing style. Take a closer look at the characteristics of these types of stocks to see if they fit into your investment portfolio.
Definition of a Penny Stock
There is actually no exact definition for a penny stock, but one widely regarded classification method is the share price. A stock will usually be classified as a penny stock if it is currently selling for less than five dollars per share. This isn’t a hard rule, however.
Characteristics of Penny Stocks
One defining characteristic of a penny stock is that it is extremely speculative. Often times the underlying company is a startup or is not yet profitable. If you invest your money in a penny stock, there is a high likelihood that you could lose it all. For example, a particular penny stock company might be researching a new drug to cure cancer. As of now, it has never made any money, and in all likelihood it never will. However, if it does discover the cure, then you could find yourself massively wealthy almost overnight.
How Are Penny Stocks Traded?
Most penny stocks don’t trade on the major stock exchanges, like the NASDAQ or the NYSE. Instead, they are traded “over the counter”. These over the counter stocks are often referred to as the pink sheets. Because they do not trade on the major stock exchanges, they can sometimes have little to no volume for weeks or months at a time, and it is more difficult to get a daily quote.
“Penny Stock Rules.” U.S. Securities and Exchange Commission (Home Page). N.p., n.d. Web. 8 Nov. 2010. http://www.sec.gov/answers/penny.htm.
“Important Information on Penny Stocks.” U.S. Securities and Exchange Commission (Home Page). N.p., n.d. Web. 8 Nov. 2010. http://www.sec.gov/investor/schedule15g.htm.