About the Nasdaq Penny Stock Lists

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Researching stocks on a tablet
Researching stocks on a tablet (Image: Bartłomiej Szewczyk/iStock/Getty Images)

Investors interested in penny stocks look for ways to make money quickly or get in on the ground floor of a company that will greatly expand. As the U.S. Securities and Exchange Commission informs investors, if you are going to buy penny stocks, know that they are among the riskiest investments and be ready to lose the entire investment. For investors who want to speculate and research penny stocks to find a hidden gem, a starting point can be Nasdaq's stock screener, which allows you to create a penny stock list.

Penny Stock Lists

The Nasdaq stock market is technically an over-the-counter, or OTC, exchange because of the way it operates linking dealers. However, Nasdaq's standards for companies listed on its own exchange are much higher than its standards for the additional companies it provides information about to investors that use the website's stock screener. For example, companies on the penny stock lists, generated from the screener on Nasdaq's website, range from stocks that trade on the New York Stock Exchange and must pass through a strict vetting process to stocks that trade on no exchange and must be purchased directly from the company or a representative agent, if possible. Just because Nasdaq provides free customized data encompassing hundreds of penny stocks does not mean the exchange has examined each stock unless that company is listed with the Nasdaq exchange.

Penny Stock Characteristics

Penny stocks are those trading for less than $5 per share, according to the SEC. Some investors narrow the description to include only those trading at $1 or less. Penny stocks that have small market capitalizations and cannot meet the requirements to be listed on a major exchange may not provide public information to the investor. An investor who purchases shares of a company that does not disclose financial data is in effect investing in the dark. Nasdaq warns against this type of investing on its website, calling penny stocks an annoyance to the SEC due to the lack of financial data on many of the companies.

Trading Activity

Investors can use Nasdaq's penny stock lists to research trading activity. High volume trading typically means an investor pays less in brokerage commissions and transaction fees. Excessive spreads may indicate that the stock trades sporadically. Wide spreads can result in higher trading costs. For example, suppose you place a market order in a penny stock trading with a bid of 30 cents and an ask price of 60 cents. You purchase 10,000 shares of the stock for $6,000, which doesn't seem like a large investment, until you take ownership of the stock and realize you've already lost 50 percent of your investment because the stock's market value hovers around 30 cents, the bid price.

Experts' Warnings

Experts, including those from Nasdaq and the SEC, warn investors that penny stocks attract swindlers who manipulate share prices, publicize the stock as the next great thing, take investors' funds and then abandon the stock while prices tumble. To use Nasdaq's penny stock lists in a productive way means researching those that report to the SEC, have been vetted by a major exchange and disclose financial records to potential investors.

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