Penny stock is a comparatively low priced stock of value less than $5 and little market capitalization. Trading of these stocks take place outside normal market operations and highly risky due to its extreme speculative nature. Other characteristics include limited disclosure and following and huge bidding spreads.
Trading of these stocks is usually of OTCBB (over the counter bulletin board) type and involves pink slips. Trading is infrequent and risky. These stocks are usually marked with suffix ‘OB’ and do not require listing. A typical penny stock trading takes place outside normal market trading at rates of below $5. However there are certain times when large companies with high liquidity ratio resort to trading of stocks at this low value.
As trading of penny stock takes place across the counter they not need strict filing regularities and listing requirements. Infrequent trading outside normal market makes penny stock highly speculative. Being highly speculative these also lure investors who are on the lookout of immediate returns. Stock traders often assume that these stocks would mature into listed shares and the companies evolve as major joint stock companies.
This conversion does not happen fast and often takes considerable time. In most instances these small companies who sell stocks at less than $5 continue with this trend to raise money. For a company to become joint stock an initial public offering is compulsory which is to be done through a expansive procedure. The process is detailed and requires multiple formalities. Many small companies desist to mature into large limited concerns to avoid these formalities.
It is not always that small companies resort to penny stock trading. Established joint stock companies from time to time could trade in these stocks for specific reasons. Rising of money for any definite purpose could be good reason for penny trading. The money required if limited could be raised through this form of scripts trade. Dispersal of profits is another reason when limited companies offer these stocks. Corporations when at their highest point of growth need to change their tax structure often opt for this kind of stock trading.
It must be noted that these stocks are more often offered by small companies who want to make money fast. There are brokerage firms who specialise in penny stock trading. Certain of these firms in the greed of making easy money convince companies into these stocks to unwary traders and investors. At certain other times a company seeing less promise in its future could offload their share of ownership to other investors in form of stock.
Investors who are interested in value trading or long term profits keep away from trading of these stocks. Even though there are well organized companies trading on these stocks, it is difficult to gauge them as the availability of information is limited. The companies trading on these stocks are not required to file their returns to Securities and Exchange Commission and have limited listing requirements.
For engaging in trading of these stocks you need to be very careful and trust the company that is offering them. Instead of dealing with shady concerns it is always wise to trade in penny stocks offered by established corporations.
