About the NASDAQ Penny Stock Lists
The mention of the term "penny stock" conjures up images of shady dealers and overnight millionaires. The romance of penny stocks is the notion that the average person could afford to buy a large block of stock and get rich when the company takes off. Almost since its inception, the NASDAQ has been synonymous with penny stock trading. Since the NASDAQ started as simply an electronic bulletin board listing different stocks, it was the first true penny stock list. Generally, a penny stock is considered any stock trading below five dollars per share.
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History
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The NASDAQ began in 1971 and quickly took over the Over-The-Counter (OTC) market. The OTC market still exists today, but it is now separate and distinct from the modern NASDAQ. The early NASDAQ stocks were often companies no one had ever heard of, and they traded at literally pennies per share. It was not uncommon for average investors to buy OTC stocks in blocks of 100,000 shares or more at a time.
From the 1980s until the advent of the Internet in the mid-1990s, penny stock trading on the NASDAQ was rife with abuse. With no reliable means to obtain accurate stock quotes or research, the penny stock investor relied solely on his broker's recommendations to buy or sell. The penny stocks often had enormous bid-ask spreads, enriching the brokerage firms but costing the investor as much as 50 percent of his investment the moment he bought the stock. Regulations were put in place to curb these abuses but were largely ignored. Several high-profile success stories of companies going from penny stock to major corporations were all it took to sustain the market.
Since the advent of the Internet, information is more freely available. Trading in penny stocks has increased, but the spreads and the abuse have decreased (though certainly still exist). A more informed investing public has benefited the overall market. Today's penny stocks mostly trade on the OTC Bulletin Board and the Pink Sheets.
Function
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After the crash of 2008, many otherwise respectable stocks suddenly met the criteria of penny stocks. However, in the strictest sense of the term, penny stocks refer to poorly capitalized ventures whose stocks trade for under a dollar. The function of the OTC Bulletin Board is to provide bid and ask pricing quotes and volume information for the penny stocks listed on the Bulletin Board. Most penny stocks are listed on the Bulletin Board because they don't meet the listing requirements of the broader exchanges.
Identification
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Penny stocks listed on the Bulletin Board are identified by their stock symbol. Their symbol will be four or five letters and the designator ".OB" following their symbol. When stocks are delisted from the NASDAQ to the Bulletin Board, they may gain a fifth letter in their symbol to designate their conditional status.
Considerations
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Reliable research can be difficult to find when it comes to penny stocks. There is a reason they are trading for pennies. For every penny stock that has become a major success story, there are thousands that went bust.
Warning
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The unregulated nature of penny stocks has always made them a haven for con artists and schemers. Penny stocks are particularly vulnerable to pump and dump schemes, where the price of the stock is run up by unscrupulous promoters only to be dumped on unsuspecting investors at the higher price. Do not buy penny stocks just because they're cheap. Be sure to know what you are buying before you place that trade.
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