Penny stocks are frequently the appropriate first stop for novice investors. Penny stocks, as the name suggests, are those businesses that trade with a cheap share price, frequently less than $1. It’s easy to see why novices are drawn in by the idea of investing in a business for a few cents and then profitably selling their shares when the price rises to multiple dollars. Because to the incredibly low prices, an investor can own thousands of shares for a relatively small investment.
But heed this fair warning: Due to their lack of liquidity, wide bid-ask spreads (the amount by which the ask price for an asset exceeds the bid price), small market capitalization, and restricted following and disclosure, such stocks are typically regarded as being highly speculative and high risk.
KEY TAKEAWAYS
- Companies that frequently trade for less than $1 per share are known as penny stocks.
- Because the major stock exchanges, such NYSE and Nasdaq, have listing conditions that must be met, including a minimum share price, penny stocks frequently trade off the major market exchanges.
- Lack of liquidity can be a key problem with penny stocks; it’s not unusual for an investor to become trapped in a position for several days or weeks before there is sufficient supply or demand to enter or leave a position.
Understanding Penny Stocks
A “penny stock” is a securities issued by a small-cap or micro-cap company with a market capitalization of less than $250 million, according to the Securities and Exchange Commission (SEC).
Think of penny stocks as the opposite of blue-chip stocks: they frequently have little or no financial history, or a bad one: The underlying company may be on the verge of bankruptcy. Others define penny stocks as those that trade at less than $5 per share (though some experts choose to adopt a lower cut-off value of $1 per share).
Typically, a penny stock trades off the main stock exchanges. This is due to the large stock exchanges’ listing criteria for the businesses that trade on them, such NYSE and Nasdaq. If a firm fails to maintain a minimum closing bid price of $1 per share after 180 days, Nasdaq will delist its shares.
Narrowing Down Trading Candidates
The next step is to choose which stock to trade once you have a better understanding of where to trade penny stocks. Using stock screening tools, such the one on the OTC Markets website or Finviz, is a common strategy.
The simplest technique to reduce the trading universe is to screen for stocks with a price below $1.
Depending on your approach and level of risk tolerance, you can further narrow the selection down from here.
Your list, based on the filter above, should resemble this once you master using Finviz’s stock screener:
| No. | Ticker | Company | Sector | Price ($) |
| 1 | ASRT | Assertio Holdings, Inc. | Drug Manufacturers | 0.99 |
| 2 | CPHI | China Pharma Holdings, Inc. | Drug Manufacturers | 0.67 |
| 3 | NEPT | Neptune Wellness Solutions, Inc. | Drug Manufacturers | 0.66 |
| 4 | RMTI | Rockwell Medical, Inc. | Drug Manufacturers | 0.65 |
| 5 | SNDL | Sundial Growers, Inc. | Drug Manufacturers | 0.72 |
| 6 | TLGT | Teligent, Inc. | Drug Manufacturers | 0.45 |
| 7 | TXMD | TherapeuticsMD, Inc. | Drug Manufacturers | 0.77 |
| 8 | ZOM | Zomedica Corp. | Drug Manufacturers | 0.60 |
Opening an Account
When opening a trading account, there are numerous things to take into account, including costs, customer service, and how simple it is to move money. Choose a broker that will fulfil your needs by taking your time to compare their specialisations. The fee structure is one element that penny stock investors should pay close attention to. Some brokers charge commissions based on the number of shares.
A per-share structure might be more appropriate for buyers of a small number of shares, but it might not be the ideal option for penny stock traders.
Understanding the Risks
It’s crucial to comprehend the dangers associated with trading penny stocks. These securities typically don’t have a following in the financial community because the majority of institutional investors, such as mutual funds, index funds, and money managers, are prohibited by charter from trading penny stocks.
Since retail investors frequently become caught in a position for days or weeks before there is enough supply or demand to enter or exit, suffering significant price changes along the way, liquidity is a key concern.