Penny Stocks – What they are and how they can benefit you!
Penny stocks have been on trend again recently following the Gamestop drama, with many looking for the ‘next GME’. This has since caused a huge surge in memberships of penny stock-related subreddits, resulting in wider hype-trains forming around particular stocks (for better or for worse), with brokers experiencing a massive rise in demand and volume relating to smaller, more ‘profitable’ stocks.
Here, we aim to answer your most basic questions, such as; what exactly a penny stock is, which ones you might have heard of, and where exactly you can trade them.
So… What is a penny stock?
A ‘penny stock’ refers to the public floated stock of a company that is comparatively small in stature and trading size. The term references stocks that are, as you might have guessed, priced in the range of one or several pennies.
Nowadays, however, the term is defined by the U.S. Securities and Exchange Commission (SEC) as any stock priced under $5 and less than 300m mcap. Whilst you may find some trading on exchanges such as the NYSE and LSE the vast majority are traded as over-the-counter (OTC) transactions through the exclusively online OTC Bulletin Board (OTCBB) and OTC Markets Group.
It is worth mentioning that penny stocks on the OTCBB are not required to adhere to minimum standard requirements in order to remain available for sale, as would be the case on larger and more reputable exchanges.
In terms of behaviour, penny stocks are defined by a high degree of volatility, meaning potentially huge upsides, but equally high risk on investment. This is coupled with a key issue in that penny stocks are often traded infrequently, meaning their liquidity is as volatile as their pricing.
Penny stocks that blew up
Some penny stocks go on to become market leaders (though this may take years to come to fruition), whilst many fade into obscurity, below are an example of the little warriors who made it big.
With figures accurate as of 22/02/2021;
<$2 a share in 1997, peak $3405 in 2021.
<$0.06 a share in 2003, peak $92 in 2021.
$1.61 a share in 2015, peak $97 in 2021.
Whilst many see penny stocks as a perfect pump and dump opportunity, stocks such as Amazon prove that perhaps going long may be a risk worth taking.
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