Free Information About Penny Stocks

Penny stocks can be worth more than a penny, but they are still cheaper than most other stocks.

Penny stocks are stocks that do not trade at a high enough price to appear on a stock exchange. Bargain investors purchase penny stocks because even a small change in the value of a penny stock can greatly increase the value of an investment. Penny stocks are riskier than other stocks because their low value implies that other investors do not want to purchase them.

Stock Analysis

Penny stock information can be hard to find. Market analysts often study the higher price stocks that trade on an exchange and may not provide an opinion on the value of many penny stocks. The Securities and Exchange Commission does not need to approve a penny stock offering, so the SEC does not guarantee that the information that a penny stock seller provides is accurate.

Price Manipulation

Since the penny stock trades at a low price, it is easier for a large investor to manipulate the price. It is very costly for an investor to manipulate the value of a share of stock when it trades for $100 a share and the firm has a million shares outstanding. It is much cheaper for an investor to buy up thousands of shares of a stock at one cent a share and then sell off these shares at a target price.

Spread Cost

Since the penny stock does not trade on an exchange, the stockbroker may act as a market maker for the stock, handling all purchases and sales itself. When this situation occurs, the market maker quotes a bid and ask price instead of quoting a single price for the stock. The difference between these two prices, or the spread, can be very high in comparison with share value when an investor trades penny stock, especially if there are no competing market makers who allow investors to trade the stock.

Liquidity

Penny stocks do not always trade frequently. If there is no market maker for the stock, it may be very difficult for an investor to find another buyer who will purchase the stock. The penny stock holder may have to offer the stock at a very low price or wait a long time before another investor will buy it. For this reason, investors often classify penny stocks as an illiquid investment, unlike other stocks. Higher value stocks that trade on an exchange are much easier to buy and sell.

Definition

The definition of a penny stock varies. The South Carolina Attorney General's website states that a penny stock can be worth as much as eight dollars per share. The total market value of the company offering the penny stock is part of the qualification. Some investors refer to penny stocks as microcap stocks because the penny stock firm has less capital available than a firm whose shares trade on a stock exchange.

References

• Securities and Exchange Commission: Important Information on Penny Stocks
• State of Missouri: Penny Stocks
• State of South Carolina: Penny Stocks/Microcap Stocks
• Securities and Exchange Commission: Microcap Stock