The Appeal of Penny Stocks

Traders use the term penny stocks to describe shares that sell for less than $5.00 apiece. Also known as micro-cap stocks, this stock generally have a capitalization of between $50 million and $300 million. Stocks with capitalization below $50 million dollar are Nano-cap stocks. These stocks are much riskier than traditional stocks, they are subject to less rigorous filing and listing standards, and they are prone to volatile price swings. Some micro-cap stocks are officially listed on the "NASDQ", and these stocks are subjected to more complete and comprehensive regulations. This is where the most official penny stock trades occur.

The "Over the Counter Bulletin Board" (OTC-BB) is another way to participate in official penny stock trading. Trading it over the counter does not require the use of a broker. YOU can open an online account with any of the most popular discount brokerage firms and find a platform and fee structure that meets your needs. The bids are placed between individuals via phone call or on-line trading platform. It has been officially de-listed from the major stock exchanges, due to bankruptcy or financial issues. Since these stocks were once listed on the major exchanges, they are required to file annual reports and quarterly earnings statements with the Security and Exchange Commission (SEC). Other companies may be trading on the OTC-BB because they are not quite ready for prime time, and they are using this experience to measure investor interest. These stocks are good bets for official penny stock trading, and may prove to be less risky than stocks traded on the pink sheets, especially if you are investing for the long term and not looking to make a quick profit.

The pink sheet is the daily digest of it available. It is compiled by the National Quotation Bureau and publishes the bid and asks prices of over the counter stocks. This is the official listing for most of these stocks. In order to be listed on the pink sheets, a company must file a compliance form with the OTC Compliance Unit. Companies are supposed to list all pertinent financial information. The more open a company is to publicizing their books, the more credible and less risky their stock will be. Companies listed on the official penny stock trading pink sheets are not required to file any financial paperwork with the SEC. This makes finding unbiased research very challenging. Without solid information and research, traders can manipulate pink sheet stocks. Investors in pink sheet stocks should understand the inherent risks in these types of stocks and plan accordingly.

While the biggest appeal of pink sheet and these stocks are their low prices, investors need to understand the inherent risk involved in these undocumented and unregulated stocks. A penny stock investor needs to create and adhere to a much disciplined investment schedule - and understand that these stocks are much riskier than more traditional stocks. By using official penny stock trading websites and resources from Paradigm Capital Management, you can hedge your bets against market and price manipulation.

Also read: Paradigm Capital Management Ways to Manage Risk with Penny Stock Trading