Penny Stocks 101 – Buying & Selling

Just what is a penny stock? Some people believe penny stocks are for companies with no assets and that penny stocks are always pennies per share. But, this just isn’t true.

Others believe that penny stocks are only traded in back alleys somewhere.

Did you know that stock for big companies, such as Microsoft and Wal-Mart, were penny stocks at one point in time? For many, penny stocks represent a real goldmine.

I hope this article will help shed some light on penny stocks for you. Be sure to explore Penny Stocks Capitalist for more great information and stock tips.

Penny Stocks Defined

Penny stocks are stocks that are being traded at $5 or less per share. Usually, these companies are smaller. Their classification as a penny stock is solely about the price the stock is being traded at and has nothing to do with the company’s market capitalization—some people confuse penny stocks with microcap stocks.

From the U.S. Securities and Exchange Commision’s Web site: “The term “penny stock” generally refers to low-priced (below $5), speculative securities of very small companies.”

While many penny stock Web sites tend to focus on companies that offer “sub-penny” shares, any stock up to $5 is a penny stock.

Penny Stocks Trading

Penny stocks are traded in various places. For instance, you can find penny stocks being traded over the counter (OTC Bulletin Board and Pink Sheets) and on securities exchanges, such as Nasdaq, AMEX and the NYSE.

Many stock investors believe that penny stocks are only traded “outside of the normal market.”

Here’s a quick list of some random penny stocks being traded on the Nasdaq, AMEX and NYSE (at the time of this writing):

3COM CP (NasdaqGS: COMS)

Actuate Corp (NasdaqGD: ACTU)

Salary.com (NasdaqGM: SLRY)

Cycle Country Accessories (AMEX: ATC)

BlueLinx Holdings (NYSE: BXC)

Huttig Building Products (NYSE: HBP)

Penny Stocks Research

Researching penny stocks is a little more difficult than researching a large-cap stock. There isn’t as much information available.

You should always research a penny stock before taking the plunge. In our next section, we’ll talk about penny stock fraud. Make sure the company you invest in is a real company with real operations and not a shell corporation—do this regardless of the price of the stock.

You can start your research in many places—your online trading broker is a good start. Yahoo! Finance (finance.yahoo.com) is another great starting point.

Penny Stocks Fraud

You should always be cautious when investing in the stock market. Always do your own research.

One way to avoid being the victim of stock fraud is to research the company via well-known financial portals, such as Yahoo! Finance and your online stockbroker. Check to see what exactly the company is doing. Look into their operations. Look for news. And make sure it’s a real company.

Online stock forums, especially penny stock forums, are key targets for “pump and dump” con artists. Here’s how it works:

1. The person/company purchases stock in a company.

2. They then pump the stock everywhere (forums, email blasts, etc).

3. The stock goes up and they sell their large holding.

4. The stock falls and you lose money.

This happens all day long and with all types of stocks (not just penny stocks). Many pump and dump campaigns involve Pink Sheet and OTC Bulletin Board stocks. Additionally, the stocks are usually very cheap (sub-penny).

While forums might be fun to participate in, always do your own research.

One more way to protect yourself is to only trade with a highly-recognized broker. Fly-by-night brokers can charge you more than a penny stock is worth (another form of penny stock fraud).