How to Invest In Penny Stocks?

Experienced investors with higher risk tolerance sometimes turn 

to penny stocks. Penny stocks are those companies that trade with 

a share price that is below $5; however, often penny stocks can be 

less than $1, as the name suggests. So you can see why rookie investors 

get hooked by the dream of buying into a company for only a few cents 

and then selling shares for a substantial profit when the price trades back 

in the multi-dollar levels. The extremely low share prices allow an investor 

to hold thousands of shares for a relatively small amount of invested capital. 

With that scale, the gain of just a few cents per share can translate into sizable 

percentage returns; however, it is important to note the reverse is also true, 

of course.

Of course, such stocks are considered to be highly speculative because of their 
lack of liquidity, large bid-ask spreads, small market capitalization and limited 
following and disclosure. If you feel like you are ready to start trading penny 
stocks, though, here are some guidelines.

Where to Find Penny Stocks

Some penny stocks are traded on regular exchanges such as the 

Nasdaq. However, major stock exchanges, such as the NYSE and 

Nasdaq, have special listing requirements. For example, according to 

Nasdaq Rule 5550(a), failure to have a minimum bid price of at least $1 

per share for primary equities will result in being delisted.

Thus, literal penny stocks that trade for less than $1 per share, as well as 

some stocks under $5 per share, are primarily traded on the over-the-counter 

bulletin board (OTCBB), and through the Pink Sheets. The Pink Sheets are 

merely a quotation publisher, while the OTCBB holds a bit more legitimacy as 

it maintains some minimum listing requirements. Pink Sheets stocks are not 

registered with the SEC, nor subject to any listing requirements, and therefore 

carry substantially more risk.