A penny stock is an inexpensive stock, usually one valued at less than $5. Many penny stocks are over-the-counter stocks, meaning they're sold through networks of brokers outside of major exchanges like the Nasdaq and the New York Stock Exchange. You can usually buy penny stocks through E-Trade and other brokerages the same way as you can buy other stocks, by searching for the company name or ticker symbol. Do research before buying any stock and watch for penny stock scams.
Understanding Penny and OTC Stocks
A penny stock is a term for an inexpensive stock. Penny stocks don't literally have to sell for pennies, and the term is typically used in the United States to mean stocks that sell for less than $5 per share. Like other stocks, they represent a partial ownership stake in a company. They also usually enable their owners to vote on company directors and shareholder resolutions, collect any dividends and ultimately reap the benefits of increases in stock price should they sell their shares.
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Many penny stocks are also what are called over-the-counter stocks, meaning they're not traded through major exchanges like the New York Stock Exchange or Nasdaq. OTC trading happens through networks of brokers, and investors should be aware that it can take longer to buy and sell OTC stocks. OTC prices can fluctuate quickly, meaning you may have trouble buying and selling the stocks for the prices you want.
Trading OTC and Penny Stocks
Many brokerages, including E-Trade, let you buy and sell OTC stocks and penny stocks similarly to other stocks traded on exchanges. Search for the company name or ticker symbol and put in a buy or sell order. Make sure you've done your due diligence and understand the risks of investing and any trading commissions you'll pay when you buy and sell the stock. Then, use E-Trade for the penny stocks you want to buy or sell or another brokerage of your choice.
Contact E-Trade or another brokerage if you don't see a stock you want to buy or have other questions about penny stock or OTC trading.
Do research into any company you're considering investing in, no matter how much or how little its shares are worth. Consult paperwork filed publicly with the Securities and Exchange Commission and other regulators, as well as news about the company, reports from reputable market analysts and any data available through your brokerage or your favorite financial information websites.
Penny Stock Potential
The reason many investors are attracted to penny stocks is their potential for a large gain. That is, if you buy a stock for under $5 in a company that turns out to do well, you can stand to make a lot of money when the stock leaves penny territory. The relatively small market capitalization, or total stock value, and low number of outstanding shares also lend to the rapid price fluctuations, which mean you can possibly make a lot of money in a short amount of time from penny stocks.
Penny Stock Risks
It's important to remember, though, that many penny stocks are cheap for a reason. They might be struggling startups or older companies that have lost their luster. As with other stocks, you can potentially lose all your money if the value of a stock falls to zero or lose substantial amounts if the price drops and doesn't recover before you sell.
Also keep in mind that some penny stocks become the subject of what are called pump-and-dump scams. The term refers to situations where fraudsters buy cheap stocks, tout the companies online or through other media without mentioning they own the stock and then sell the stock when the value rises. If you follow their recommendations, you can be left holding the stock when the price drops again, costing you money. Remember to only follow stock market advice from sources you trust and to double-check any reports you see from lesser known sources.