The Lowdown on Penny Stocks

What Wall St. doesn’t want you to know about penny stocks.

What are penny stocks?

Low-priced, small-cap stocks are known as penny stocks. Contrary to their name, penny stocks rarely cost a penny. The SEC considers a penny stock to be pretty much anything under $5. And while there are sub $5 stocks trading on big exchanges like NYSE and NASDAQ, most investors don’t think of these when asked to describe a penny stock.

How to buy penny stocks?

Just like any other stock you would buy, you can purchase shares of a penny stock through your normal stockbroker — regardless of whether or not it’s listed on a major exchange. Though cheap stocks are listed on exchanges like NYSE and NASDAQ, they are usually not called “Penny Stocks” because these exchanges have strict listing requirements. More often, penny stocks trade on listing services like OTCBB and Pink Sheets.

• Over-the-Counter Bulletin Board (or OTCBB) is a quotation and maintains listing requirements (though they are less stringent than stock exchanges), which adds a bit of legitimacy to the listed stocks.
• Pink Sheets is a system that provides investors with quotation information on stocks that are registered with it. Unlike OTCBB, however, Pink Sheets isn’t registered with the SEC and doesn’t enforce any listing requirements. Bottom Line: Pink Sheets stocks are risky.

The potential payoff of penny stocks

With all the risk involved, why would anyone want to put their money into a penny stock? The short answer is volatility. Because penny stocks are prone to violent fluctuation (volatility), many people believe that they’ll luck out with a stock that will jump from $0.11 to $7 in two weeks. And it’s happened. Numbers vary quite a bit in the penny stock world, but investors have raked in gains over 1,000% in a couple weeks’ time. The real trick is finding the right stock. This is where our financial experts come in.