Despite what the name implies, most penny stocks do not cost just a penny.
In fact, any stock at $5 or less is considered a penny stock.
While you’ll find some of the major exchanges such as the NASDAQ or NYSE, you’ll also find noteworthy ones listed on the OTCBB, or the “Over the Counter Bulletin Board” stocks. You’ll also find some listed on the riskier pink sheets, where listing requirements are less strict.
Benefits of Investing in Penny Stocks
For one, they’re cheaper and can offer bigger returns than a $100 stock. Then again, you really need to dig for the gems amid the garbage that exists.
Two, you can invest small. Not everyone has thousands of dollars to invest in a stock. Penny stocks allow you to invest small amounts without mortgaging the home.
Three, real opportunities exist. ACADIA Pharmaceuticals (ACAD) once traded at $1.05 a share with great news emerging on its Parkinson’s disease Psychosis (PDP) drug. Once it began to attract attention, the stock soared to more than $54.
Pitfalls of Investing in Penny Stocks
Along with its many benefits, there are pitfalls.
For one, they’re highly speculative and can carry more risk. Some are low-volume, making it difficult to get in or out of a stock. In addition, there’s not a great deal of regulation to protect you. In fact, some listings are unregulated, and can cost you a bit of money if you haven’t done your own due diligence.
However, that’s why we always advise proper due diligence.
How to Find Penny Stocks to Own
One great thing about penny stock trading is that you probably do not need to look for a broker.
Check penny stock listings on the OTCBB and Pink Sheets. Once there, start researching the companies on your own.
Look up lists of the 10 best penny stocks and review.
Do your due diligence. Is revenue and EPS improving quarter or quarter, year over year? Does it have manageable debt levels? Does it have a respectable team running the company? How has the competition fared? Is the company growing or hanging on by a thread?