What Are Penny Stocks, And Why Should You Care?

If you havent heard of penny stocks, maybe you should stop and read this. penny stocks, as odd as it may seem, are responsible for the vast majority of stock trading in the US each day, accounting for over three-fifths of the NASDAQ stocks traded and over three-quarters of the stocks traded on the NYSE. But what are penny stocks, really?

Penny stocks, as their name implies, are stocks with a low share price, often under a dollar. But this does not mean much in terms of their trading, because they are most often traded in lots of at least a thousand, and more often tens of thousands, of shares.


What are penny stocks when seen by entrepreneurs? Suppose you have a company selling widgets, and everyone who buys your widgets raves about them. Youd like to sell your widgets to the entire world, which really needs good widgets, but you dont have the money to manufacture them in sufficient numbers. So you decide to raise money by taking your company public. You need a million dollars, and you can sell your stock at any initial price you like.

But the chances of your being to sell a million shares of stock at $1 each are much better than your being able to sell 100,000 shares at $10 each, because more people will be willing take a chance on an unproven widget company for $1 than for $10. Same company, same amount of money, but cheaper stock. In your case, the question What are penny stocks? can be answered with The way to get my company public.

But for stock traders, the question What are penny stocks? can produce multiple answers. Some will say that any stock which trades for less than $1 is a penny stock. Others say that a stock can be classified as a penny stock depending on the total market value of the company issuing it. Others have specific categories into which a stock must fit before being classified as a penny stock.

But all traders on the buy side of a penny stock trade will agree that penny stocks are the ones most likely to rapidly escalate in price and bring them substantial profits. And for those holding them, the question What are penny stocks? can be answered with the statement that penny stocks are the ones you sell as soon as they are in profit, because they are simply too volatile to hold long term. In the penny stock world, the best time to take profits is as son as you have them.

And for the investment industry, the question, What are penny stocks? is answered with the single word, Opportunity. For the traders, they are an opportunity to make returns unheard of in other investments: for brokerage houses, they are a major source of trading commissions. For startup companies, they are the opportunity to grow. Penny stocks, for all their volatility, are an essential part of the American economic landscape.

By: Wade Robins

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