Penny stocks are generally traded on in any market if we follow its broad definition of stock price of less than $5.00. While penny stocks are mostly traded over-the-counter, they can also be traded on US exchanges (such as NASDAQ) or foreign exchanges.
Penny stocks can be categorised into two areas – firstly, the small and growing companies, and secondly, the well-established ones that are on the downslide. There are many companies consistently trading either on the NYSE or the NASDAQ whose stocks fall under the definition of a penny stock. It is advisable to avoid investing in such companies, since their stock price indicates that they may be on the brink of getting de-listed from the exchange.
Before investing in a penny stock, it is advisable to know fully about the market where the penny stock is trading so as to determine its demand. This helps while one is selling off the penny stock.
The penny stock is generally traded over-the-counter, on either the Pink Sheets or the Over-the-Counter Bulletin Board (OTCBB).
It is mandatory for all OTCBB stocks to regularly file quarterly as well as annual financial reports with the SEC (Securities and Exchange Commission), and thus it is much safer to choose a penny stock from here.
A major part of the US OTC stock market is the National Quotation Bureau (NQB) also referred to as "Pink Sheets." All information about the NQB's securities is printed on sheets of pink paper. We can look for Pink Sheet quotes on many internet websites. Pink Sheets market is a risky market as it requires no quantitative norms to be followed by an issuer of securities. Here, it is very difficult to get accurate information about small companies. However, now the Pink Sheets have issued a new classification structure that helps one to differentiate between companies with inadequate information and those that are credible ones.
A part of the over-the-counter market is the well known NASDAQ National Market (NNM) which does not include any penny stocks. Non-NNM NASDAQ securities include some penny stocks, which follow certain listed standards.
As per the US official definition of a penny stock, they can also be traded on the American Stock Exchange (AMEX) as well as the NASDAQ as small cap stocks. These major exchanges necessarily require information about the business operations of the company under their disclosure norms.
Thus, penny stocks are usually traded on specific stock markets just because they are unable to fulfill the requirements of mature and large stock exchanges. They are high risk securities, and their daily trading volume is also significantly lesser than major stock exchanges. The companies that are listed on the penny stock exchanges are relatively new, and have not seen much of the day as compared to blue chip companies.
Penny stocks are traded infrequently, and one may also find it very difficult to find quotations for many such stocks which make buying and selling a difficult proposition. One must invest in penny stocks only after complete information about the risks involved.
© 2008 Penny Stocks.