Investing in Penny Stocks
Penny Stocks...The Blue Chip Killer
By Jim Nelson, Penny Sleuth Editor
Penny Stocks: An Introduction
Penny stocks are hated, loathed, even detested. Why? Because Wall Street is scared of penny stocks…It is afraid to take some chances, even if the rewards far outweigh the risks.
Take a look at just a couple of penny stock examples…
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Source: Big Charts Source: Big Charts
Both of these companies traded for practically nothing and ended up bringing in huge profits for their shareholders. You won’t see any blue chip stock do that; gains like these are reserved for penny stocks.
Now, I know what you’re thinking…Not every penny stock will do that. What about the ones that go bankrupt and fall apart?
Well, you’re right. Some do collapse. It takes hours of research and analysis to find the ones capable of quadruple-digit gains, opposed to the ones that go belly up.
But even so, many people just dismiss penny stocks without even truly knowing what they are. Here is a brief overview…
Penny Stocks: A Sea of Definitions
The definition of a penny stock has been debated for years. Everyone has his or her own idea of the exact meaning.
Some say that penny stocks are simply stocks that trade for pennies per share. Others say they are anything under $5 or $10 per share. Even if a stock passes the price-per-share requirement, some still won’t consider it a penny stock unless its total market capitalization (i.e., the total market value of the company) is under $1-1.5 billion.
For our purposes, let’s define “penny stock” as anything with a market cap under $1.5 billion and trading for under $10 per share.
Some so-called analysts won’t even consider anything that trades on a major exchange a penny stock. So let’s take a look…
Penny Stocks: Finding Tiny Companies on Huge Exchanges
To keep it simple, there are three major exchanges in the U.S. you should be familiar with: the New York Stock Exchange (NYSE), the American Stock Exchange (Amex) and the Nasdaq. Despite what some say, penny stocks are traded on all three of these. (In fact, spreading your penny stock portfolio across the three isn’t a bad idea, either.)
The Nasdaq is the most common for penny stocks, for a couple reasons:
- It is very tech heavy, meaning there are a lot of technology and biotechnology companies listed. (Most tech companies are penny stocks)
- To get listed on the Nasdaq, compared with the NYSE, for instance, is much cheaper, which is important for small companies. (For a company starting with 50 million shares initially, it would cost two times as much to get on the NYSE than on the Nasdaq.)
That being said, there is another, relatively smaller set of stocks traded elsewhere…
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Penny Stocks: OTC Investing Isn’t as Scary as Wall Street Says
Over-the-counter (OTC) investing is most likely new territory for you, as it is for most investors. Companies that trade OTC are usually one of two things: 1) tiny companies without the capital or manpower to get listed on a major exchange, or 2) foreign companies looking to pick up some U.S. investors to raise extra capital.
The former is more important. Don’t get me wrong, but foreign companies traded OTC are usually very large companies without the ability to double in size easily. But the tiny ones can. So OTC companies can also bring enormous gains.
There are two main ways that over-the-counter companies trade shares: on either the Pink Sheets or the Over-the-Counter Bulletin Board (OTCBB).
The Pink Sheets is not an exchange like the Nasdaq or Amex. It's only a quotation service. The only requirement a company faces on the Pinks is that it must have at least one market maker quoting its stock. Financials do not need to be disclosed.
This scares off 99% of potential investors. The truth is many solid companies are covered in the Pink Sheets. It just takes a little extra research.
The OTCBB is just like the Pink Sheets, except it has a few more requirements.
You see, before 1990, the over-the-counter securities market was a Wild West show. Not complete lawlessness, but close to it. So that year, the SEC started the Over-the-Counter Bulletin Board as part of the Penny Stock Reform Act. The OTCBB’s main purpose was to bring more quotation and last-sale information.
By 1999, the OTCBB had evolved to the point at which every company had to report regular financial information. This sets it apart from other markets, specifically the Pink Sheets.
The fact that Wall Street continually misses is it doesn’t matter where you find these penny stocks. The only important thing is digging in and finding the ones that are ripe for huge gains. That’s what we do here at Penny Sleuth.
Sincerely,
Jim Nelson
Editor, Penny Sleuth
P.S. For more on these extremely lucrative penny stocks, check out the most insightful FREE penny stock e-letter out there, Penny Sleuth. It will be delivered every business day right to your e-mail box, and is written by top penny stock analysts from around the world, to share their freshest insights, views and analysis with you. Sign up for it here…
P.P.S. And if you are looking for something a little more detailed, check out Penny Stock Fortunes. Greg Guenthner and I give readers the scoop on what to buy, when to buy and, most importantly, when to sell. To check it out, read this free report…
More Pink Sheets Articles on Penny Sleuth
Real "Penny Stocks" are Finally Easy to Trade by Jim Nelson
The World is Your Investment Playground by Jim Nelson
Profit Potential from a Pink Sheet Nanotech by Greg Guenthner
Seven Lower Risk Pinks by Greg Guenthner
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Copyright © 2008-2009
Penny Stock Report by Agora Financial LLC.
All Rights Reserved. Information contained herein is obtained from sources
believed to be reliable, but its accuracy cannot be guaranteed.