| How to Invest in Penny Stocks |
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| Written by Jimmy Dawn |
| Tuesday, 19 January 2010 22:37 |
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When you are trading stocks under $5 it is known as a nano stock, a microcap stock, or a penny stock. Generally speaking these terms are pretty interchangeable. Although, in a broader sense a penny stock represents the total value of a business's outstanding common shares, or rather it's market capitalization, as opposed to the stock price. But there is no true definition of just what a penny stock is.
When you are trading stocks under $5 it is known as a nano stock, a microcap stock, or a penny stock. Generally speaking these terms are pretty interchangeable. Although, in a broader sense a penny stock represents the total value of a business's outstanding common shares, or rather it's market capitalization, as opposed to the stock price. But there is no true definition of just what a penny stock is. In order to determine a business's market capitalization, or market cap, you have to take the business's stock cost times the number of shares that are still pending. Once you complete the above computation, you will be able to know exactly how much that business's shares are worth at any point in time. Penny stocks are exchanged in the OTC, or over-the-counter market, rather than on a stock market exchange, where most other types of stocks are exchanged. For a typical transaction involving the trading of the majority of stock, a representative will take instructions from a trader and set up a trade between the trader and another entity. The representative will then get a commission for arranging the transaction. Brokers tend to charge most penny transactions as principle transactions. This way the broker is not earning money through commissions but rather on the spread through buying an selling at key moments. The prices at which penny stocks are both bought and sold will vary. The gap between the asking price and the bid that is made is what is known as the spread. Penny stocks have a typical spread of between 25% and 33%, however they can get as high as between 50% and 100%, or higher. In addition, two bid and two ask prices are constantly present. These are known as the inside bids and asks, and the outside bids and asks. Remember that the outside bid and the outside ask are the aspects that generate the most action. Moreover, the prices of penny stocks can be marked up. This means that an agent has kept a penny stock aside, and, as a result, has assumed a portion of the risk that comes with the changes in market price. The process of buying penny stocks can be somewhat complicated and problems can sometimes arise, millions are also sometimes at risk, however they can be helpful to new companies that are struggling for capital. Discuss possible investments with your broken, this way you can be sure you're making good decisions. Just be aware that some brokers dealing in penny stocks may only be interested in selling and not the getting you the best investment. DISCLAIMER: This article is provided as information only and is not to be taken as financial advice. Learn more about Microcap Millionaires. Stop by Jimmy Dawn's site where you can find out all about Invest In Penny Stocks and what it can do for you. |