Penny stocks are exciting for investors because of the enormous potential they carry – as well as the substantial risk. Finding them, though, can be a bit tricky if you don’t know where to look. For the investor who wants to try his or her hand on penny stocks, I’ll explain where you can find them using penny stock screeners, searching exchanges, and going over the counter.
What is a Penny Stock?
For those who don’t know, a penny stock is a stock that is extremely cheap. There are two common definitions. One definition is that a penny stock is any stock that trades at $1 per share or below. The other definition, from the Securities and Exchange Commission, is that a penny stock is any stock that trades at $5 or below, which broadens the horizon considerably.
A penny stock is sometimes known as a micro-cap, or, a stock with a market capitalization (share price times number of outstanding shares) of roughly $50 million to $300 million. (Those below $50 million are called nano-cap stocks). Defining characteristics of a penny stock or micro-cap stock, besides their extremely low price per share, include relatively-low levels of trading volume at any given time and high volatility. In other words, penny stock prices go up and down a lot.
This volatility, coupled with the fact that they are very inexpensive, make them attractive to traders who want to quickly make money by profiting from high returns. If you take $10,000 and invest it in, say, Microsoft (MSFT) at $30 per share, you can buy 333 shares. A 1% increase to $30.30 would net you a profit of $99.90.
That same money spent on a $1 stock would get you 1,000 shares – and a 1% increase to $30.03 would result in a profit of $300.
Where Are Penny Stocks Traded?
You can find penny stocks either on major exchanges or off the major exchanges on decentralized markets called over-the-counter (OTC) markets.
OTC markets are decentralized collections of traders communicating to each other and trading over computer networks. The reason penny stocks wind up on these networks is because they usually can’t meet the eligibility requirements for being listed on a major exchange. In fact, a stock can only trade under $1.00 for 30 consecutive trading sessions on the New York Stock Exchange before being delisted, or removed from the exchange.
Naturally, this means there is some risk involved with shopping for stocks on OTC markets. Companies that trade on these markets rarely have to file anything related to financial data, and there is little oversight. As a result, it is riskier to trade here than with a major exchange.
How Do You Find Penny Stocks?
There are a few ways to find penny stocks for investing. The first is to look through stocks on major exchanges that are less than $1 in value (or $5, if that is the range you’d prefer; the higher the share price, the less volatile and risky it is, generally speaking). Virtually every exchange has some of these companies listed.
The second option is to use a penny stock screener. This is a piece of software that automatically scans an exchange’s listings for stocks that meet the criteria you choose (like small market capitalization, etc). These are quick ways to, for example, find stocks under $5.
The third option is to use two services to find electronic quotes: OTCBB and Pink Sheets. Both are quoting systems that give you the bid and ask prices for over-the-counter stocks, and will have micro-cap stocks available. Note that these services have minimum quote sizes; for example, for OTCBB, a bid of up to $0.50 has to be for 5,000 shares.
OTCBB requires that companies do file with the SEC, just like other exchanges (although they obviously have lax standards when it comes to market capitalization and other financials). Pink Sheets doesn’t have any of these requirements because it isn’t a stock exchange; it’s a quoting system. As a result, companies that you find there probably file periodic reports, undergo regular audits, or interact often with the SEC.
Tips for Trading Penny Stocks
The same rules for trading regular stocks – discipline, extensive research, and diversification – apply to penny stocks, but researching is far more important here. Penny stock companies aren’t as well known as other stocks on exchanges and do not have a wealth of financial information readily available. Plus, they’re more risky than exchange-traded stocks – so to make a sound investment, you really have to do your homework.
I don’t really recommend trying to make money consistently off penny stocks just by relying on technical analysis (you know, using charts and numbers alone to try to identify trends, reversals, and buying opportunities). It really helps to know something about the company before placing your order.
As long as you know the risks and are comfortable with them, penny stocks could work for you.