Stock trading is an important part of any investor's diversified portfolio. A stock or share of a company is a single unit of ownership. When investors buy the shares of any company, they become the co-owners of the firm. As such, they are entitled to all the privileges of an owner like voting.
The shares of many companies are traded on formal trading facilities like Stock Exchanges. In order for a company's shares to be traded on a particular stock exchange, that company has to comply with all the rules and regulations laid down by the Securities and Exchange Commission (SEC).
There are, however, some companies that are not in a position to comply with the rules and regulations laid down by the SEC. This could be due to financial or operational drawbacks or problems. Such companies trade outside the formal stock exchanges and instead, they do business on the Over The Counter Bulletin Board (OTCBB) and Pink Sheets. The OTCBB and Pink Sheets are electronic quotation systems that display the last traded price, volume of trade, ask price and bid price of each company's share.
The main difference between the OTCBB and the Pink Sheets is that companies that trade on OTCBB have to comply with certain rules and regulations laid down by the SEC especially those related to public disclosure of financial statements, whereas companies trading on the Pink Sheets need not comply with any such rules. Collectively, the stocks that trade on OTCBB and Pink Sheets are called Penny Stocks.
Penny Stocks have other definitions as well. When the value of a share of a company is less than $5, then such stocks are called penny stocks. Also, if the total market value of any company which is the price of a share multiplied by the number of outstanding shares of a company, is less than $500 million, then it is a penny stock. Some others view penny stocks as stock that trades on OTCBB and Pink Sheets.
Penny stocks are characterized by their thin volume of trade. This factor, along with the lack of information available about these companies, makes it a very difficult place to invest from the investor's point of view. In addition, these stocks are subject to manipulation, frauds and scams. This is the reason why financial institutions and mainstream investors stay away from penny stocks.
But this does not mean that penny stocks are bad investments. There are many gems among penny stocks that can make huge amounts of money for the investor. The trick is to find the right penny stock. This can be achieved by constant and thorough research on the company's fundamentals and financial soundness. Though information may be difficult to obtain, it is not impossible.
An investor should try every avenue to get sufficient information about these companies. Based on these collected information, the investor can make an intelligent decision as to whether a particular stock must be bought or not. This effort can go a long way in helping the investor to make huge money from penny stocks trading.
Author Resource:-
Nir Dotan is a writer and promoter of
Penny Stocks services, and
Penny Stocks Preferred source for the latest news and information on the best and brightest Small Cap Stocks.
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