Trading and Buying Penny Stocks
Stocks that do not trade on an exchange and are priced at $5 or less are known as penny stocks. Buying or investing in these stocks carries more risk than other securities, as they are normally new or emerging companies and the trading ability of them is usually limited to a fewer number of brokers who can fill penny stock trades.
These investments do not trade on the NYSE, AMEX or any other actual stock exchange. They also do not trade on NASDAQ. The trading, buying and investing of these shares is done through an Over The Counter market of firms acting as market makers. These market makers are brokerage firms that own or can readily provide the shares to investors and broker dealers.
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Penny stocks are listed in the pink sheets. This is a daily inventory and price list of the available stocks and the brokerage firms that are showing them. If a person want to begin investing in these stocks, their broker would call the market maker and buy the shares for the investor. The firm would charge a mark up, and the customer would pay that increased price.
A customer who wants to know how to invest in penny stocks should ask their broker. Firms are required to send out a risk disclosure to the customer beforehand.
Since the market is normally limited to the amount of stock firms owning these stocks, investors must be aware that their ability in trading these shares is limited to the secondary market reliablity and the amount of market makers able to sell the penny stock out for them. Since this is usually the case, the bid and ask (buy and sell) spreads can be wide.
Investors who want to use penny stocks within their portfolio should diversify the industries as much as possible. There are winners and losers across the market when investing in these smaller companies. If one industry is down, a penny stock can still bring high returns in another industry.
Most brokerage firms do not allow these shares to be bought on Margin because of the higher risk and less predictable market price that many Penny Stocks are. If a firm does allows margin trading for investing in these stocks, the requirement is normally pretty high - with some trading firms requiring up to 100% of the first trade paid in full.
A risk disclosure document is normally required to be sent before investing in these companies.
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