| Chapter 1:
Understanding the Penny Stock
Before you can begin investing in penny stocks, you do need to take the
time necessary to find the right knowledge base for the process. That
is, you need to understand what the penny stock is as well as how you
can invest in them.
What Is A Penny Stock?
The first order of business here is to define just what the term; “penny
stock” refers to. The bad news is that there are many mixed definitions
out there regarding what this type of stock actually is. Therefore, you
need to understand what things are considered to be penny stocks and
then how to determine what the stock really is.
For example, a penny stock is a common term used to describe a stock
that is inexpensive to purchase per share. This could mean:
• A stock that is priced under one dollar per share
• A stock that is priced under five dollars per share
• A stock that is traded on what is called pink sheets
• Any over the counter, or OTC, type of stock
The United States Securities Division says that a penny stock is one
that is valued under the value of five dollars and is traded either on
pink sheets (over the counter) or on the NASDAQ.
Value Counts
What you should know is that a company that trades with penny stocks is
a company that has a value that is quite low in comparison to other
companies. It should have a net worth that is four million dollars or
less in net tangible assets.
In other words, companies that are valued higher than this amount, those
that have more inventories, for example, are those that regularly trade
on the stock market. Those companies often have a good amount of history
being up and running.
In addition, they usually have what is called heavy assets. This means
that the company has a good amount of real business as well as solid
equipment and a good amount of inventory. They are usually set in what
their business is as well.
You will find that these companies are those that have fewer
inventories, less sales, and are more commonly unknown than those
companies that are traded on the stock market regularly. Of course,
that’s why they are called penny stocks. In addition, these companies
generally do not carry a large amount of business from one quarter to
the next. They may not even have defined goals or a solid business
inventory as of yet.
Terminology
One thing that makes penny stocks so, well, frustrating to learn about
is that they are often called by various different names. You may have
heard them referred to as micro stock, nano stock, micro cap stock,
small cap stocks and many other names. If that sounds confusing, just
remember that they are generally all terms that rely simply on the fact
that the stock is priced below a dollar to five dollar range. In other
words, penny stocks are quite affordable, low costing stocks.
Where They Trade
The stock markets like the New York Stock Exchange have very strict
rules about which companies can actually trade on them. In addition,
they monitor the company for what it is before allowing the company to
be traded. What does that mean? It means that companies such as those
that trade with penny stocks do not meet the criteria of the stock
market to the degree that allows them to participate.
In other words, companies that trade in penny stocks do not necessarily
have the assets, the business history or the net worth to be traded on
the New York Stock Exchange or on other stock markets. Thus, they must
be traded elsewhere.
Penny stocks are not traded on the stock market but they are still
traded. In fact, they are traded as part of what is called the OTC. OTC
stands for Over the Counter markets.
OTC markets can be part of the NASDAQ which is the National Association
of Securities Dealers Automated Quotation. The NASDAQ National Market or
NNM is made up of part of the OTC market.
Yet, there are some changes there, too. Often, the NASDAQ changes its
rules, so to speak, allowing in penny stocks when they did not. Or, they
may decide to change from allowing to not allowing any longer. Needless
to say, the number of penny stocks that are on the NASDAQ in any given
time changes readily.
So, at this point, you know that you can purchase penny stocks on the
OTC markets. These would be non-NMN penny stocks. In addition, you can
purchase them through some parts of the NASDAQ market as well. In just a
minute, we will touch on the third method of investing in penny stocks
besides these two methods.
The Benefits of NASDAQ
Not all penny stocks are traded on NASDAQ that much you should know for
sure. But, if you were to purchase stocks that are traded on this
market, you should know that NASDAQ does provide for a good amount of
regulation. That means that they do monitor the companies that are on
their market as well as insure that they meet certain criteria before
letting them change hands on the market.
In addition, there are some real benefits to working with the NASDAQ
penny stock. For example, not only do they meet the specific
requirements that the NASDAQ has in place, but they also provide for the
ability to easily track those penny stocks. That’s because the stocks
traded on this market are reported at least weekly in many local
newspapers.
This lets you easily track what is happening with the stock that you
have purchased. The benefit here is that you do not have to contact your
broker to learn about what is happening with your penny stocks.
Pink Sheet Investing
As mentioned, there is a third method to investing in penny stocks that
you should know all about. That is what is called pink sheets. The pink
sheets are actually a part of the OTC market. It is technically called
the National Quotation Bureau’s or the NQB.
This area of the penny stock market needs to be dealt with carefully. In
short, it is less simplistic to handle and here is why.
• There are no necessarily strict listing standards applied to those
penny stocks.
• There is little to no information available about pricing, as it is
difficult to learn.
• They are called pink sheets because all of the information including
lists and prices are printed onto these narrow sheets that are generally
pink in color. That’s about as accurate as you get here.
• The average investor has a hard time learning necessary information
about them.
• If you work with a broker with pink sheets, you should not have as
much of a problem obtaining the necessary information. They can contact
what is called the market makers to get necessary information on them.
• The small investor without connections will have to rely on their
stock broker for all necessary information about the penny stock that
they are trading.
As you can see, trading penny stocks can be something of a risk simply
from the way that they are set up. Yet, the investor that is educated
and knows just what is needed to make the sale can do so with the help
of a qualified stockbroker, something that we will talk about in later
chapters.
It is essential for anyone that is interested in selling penny stocks to
contact and work with a trustworthy stockbroker to insure the deal goes
well.
Although it may sound as if we are being negative about this type of
trading arrangement for penny stocks, it is not so much that it is
negative, just a fair warning.
The different types of markets that you can invest in for penny stocks
is important because you need to see the difference in the way that the
stock is traded as well as the difference in the way that it is placed
onto the market. This plays a very important role in just how likely it
is for a stock to be risky for you as well.
Those that are looking for a less risky option should take into
consideration working with a NASDAQ based stock. Those that are looking
for improved risk may not be okay with the high amount of risk that is
posed by a penny stock in the first place. Nevertheless, if you are
seasoned enough or looking for a huge windfall that plays on huge risks,
then investing in OTC stocks through the pink sheets should be
considered.
In the following chapters, we will talk more about determining your
level of risk as far as penny stocks are concerned. |