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What Are Penny Stocks?

A lot of beginner traders always ask, what are penny stocks and what makes them different from other stocks? Penny stocks are defined as any stock currently trading under $5. However when you hear other traders talk about penny stocks, they are usually under $1. Most penny stocks trade on the OTC market (over the counter). There are many different designations of penny stocks within the OTC market, with the most common ones being OTCBB and OTC. An OTCBB stock is a fully reporting company with the SEC, U.S. banking or insurance regulator. OTC stocks are more speculative and include shell companies and developmental stage companies that have little or no operations and do not have audited finances. While OTC and OTCBB stocks are what you will see the most of, there are other tiers. Below we’ll take a look at all the different tiers of the OTC market.

OTCQX – The is the highest tier of the OTC market. These companies are investor-focused companies that offer investors transparent trading, the latest information, and are easy to access. Companies in this tier are not penny stocks and some trade as high as $100.

OTCQB – Companies in this tier are fully reporting with the SEC or report to a U.S. banking or insurance regulator. These stocks are not immune to pump and dumps though, with the most recent example being LEXG. LEXG went from less than $1 to nearly $10 and back to $2 in the span of a month.

OTC Pink Sheets – There are two tiers of OTC Pink Sheets. Companies who are current with their reporting and those that are not. Companies in this tier include shell companies and companies just created who have little or no operations and do not have audited financials. These stocks should be considered highly speculative.

Grey Market – Companies in this tier are not listed, traded, or quoted on any U.S. stock exchange or OTC Markets.

Caveat Empor – Traders should avoid these stocks. Companies in this tier have a public interest concern associated with them. This may include questionable stock promotion, known investigations of fraudulent activity committed by the company, and regulatory suspensions.

Any new investor should stick with stocks in the OTCQB category.While penny stock investing has its risks, its best to stick with companies that are at least up to date and fully report their activities. You can check out otcmarkets.com to find out which companies are in which tiers. If you’re a beginner trader, you should try and stay away from stocks being promoted. In the coming weeks we will have an article up about how you can actually take advantage of pump and dumps.