Do Penny Stocks Move to the Bigger Exchanges?
Penny stocks typically are stocks priced under $5 and quoted on over-the-counter (OTC) markets. The term penny stock may appear to be a misnomer, depending on how the general definition is applied. Some stocks of under $5, and even only in pennies, are found trading on major stock exchanges. Others that are quoted on OTC markets have a price above $5. Moreover, large, established companies have had their stocks traded below $5. However, despite any contradiction in the naming, penny stocks are most likely low-priced securities of small companies that are speculative and thinly traded on the illiquid OTC markets.
Other People Are Reading
-
Listing Requirements
-
To trade on an exchange, stocks must meet certain listing requirements. The OTC markets, consisting of the Bulletin Board and the Pink Sheets in the United States, do not impose any listing standards in terms of financial conditions of a company. Companies that meet statutory requirements--meaning they are lawfully registered with authorities that govern their trade and business and possess an approved license or permit if needed--can request to be quoted on an OTC market. In contrast, major exchanges have stricter listing requirements regarding stock price, number of shares outstanding and total market capitalization. Exchange eligibility rules also require that companies file regularly updated financial statements with the Securities and Exchange Commission (SEC) in the United States.
Capital Raising
-
Penny-stock companies usually are start-ups with unproven business models. Obtaining capital for investment projects and meeting operational needs often are the primary concern relative to other financial goals. Both initial capital injection and sustained capital support have to be in place before a company may break into profits. The stock market--both the OTC and bigger exchanges--provides companies access to public funding and provides their investors a marketplace to potentially trade their investments with certain degree of liquidity. While in their developing stages, penny stock companies may have different priorities about seeking either stock performance or business advance.
-
Over the Counter
-
Many penny stocks are the so-called nano caps having a market capitalization of below $50 million. The prevalent measurement for small-cap stocks is above $300 million, which meets the requirement for regular exchange trading. Stocks with market capitalization of between $50 million to $300 million are referred to as micro caps that could be traded on either an OTC market or an exchange. Some penny stocks that have grown into micro caps choose to remain quoted on the OTC markets, especially those that have completed capital raising efforts and are focusing on business operations. Staying with an OTC market gives companies certain advantages over exchange-traded companies that must fulfill numerous reporting requirements of both the exchange and the SEC, a burden small companies would rather not have.
Exchange Trading
-
Regular exchanges are a more efficient capital market that can be especially beneficial to penny-stock companies still trying to attract investors. Some penny stocks with a trading price around the one-dollar mark can be traded on a major exchange. Market liquidity and better disclosure of company financial information helps lower the speculative risk level of penny-stock companies as seen by potential investors. Penny-stock companies in need of more capital should consider listing with a major exchange. The higher their stock's daily trading volume is on the exchange, the more sales potential of their offering on the initial market.
-
