What Are Penny Stocks?
So what are penny stocks anyway? You might hear talk about investors making a killing in hot penny stocks, or someone else losing their shirt, so to speak. With so much changing in the stock market since the recent crash in 2008 and the resulting recession, people are looking for ways to more wisely invest their money, and some are trying to take advantage of the market being so low; investing now and reaping the rewards in the future when the market rebounds.
If you try to find out what are penny stocks you will likely get a few different answers. The problem is that there are different definitions depending on where you live and what part of the stock market you invest in. Generally, a penny stock will be a share that is being sold for a small amount of money, usually less than five dollars. But in some cases a penny stock may be defined based on the value of the company, rather than the value of the share. It really depends on the location and the type of investment.
In the US, however, there are different answers to that question of what a penny stock actually is. One definition considers all penny stocks to be those that are traded outside of the major exchanges, like NASDAQ or AMEX. The SEC has a slightly different definition, where a penny stock is defined solely by the share price, as long as it is fewer than five dollars. The market capitalization of the company does not matter, nor does where you trade the stock. This means that you can trade your penny stocks on NASDAQ or through a listing service that is not a secure exchange.
If a new investor asks you what are penny stocks, you obviously won’t be able to give them a concrete definition, but at least you can provide them with a couple of descriptions that should help them understand these types of stocks. Size is the major factor when defining a penny stock, and this size could relate to the value of the penny stock itself, or the value of the company that the stock represents. Defining and understanding penny stocks is an important part of being a successful investor, since success is usually a result of research and knowledge.
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