Understanding the World of Penny Stocks

The term "penny stock" is an inherently loose investing term, and to every investor there is a different standard as to what the concept entails. There is universal consensus, however, that the term refers to a low-priced publicly-traded equity that is often associated with high risk and increased volatility. Yet more specifically, the term takes on different meanings between two particular groups - traders on the OTC:BB and investors on major national exchanges. To understand the distinction, its imperative to first breakdown the differences of the major national exchanges (upper exchanges) and the lesser-regulated counterpart of the OTC:BB & Pink Sheets (lower exchanges).

The upper exchanges are the market places at which distinguished companies have their stock traded. As a result, they have a highly regulated system of standards that must be upheld from filing periods to minimum share price requirements. The most prominent exchanges in America are the NYSE, NASDAQ, and AMEX.

The lower exchanges are broken into two categories of lesser regulation - the OTC:BB and the Pink Sheets. The OTC:BB stands for Over-the-Counter: Bulletin Board. It is an offshoot of the NASDAQ exchange, and it requires less stringent standards. Denoted by the ending tag ".ob" on their ticker symbols, OTC:BB stocks require financials to be submitted quarterly to the SEC to maintain their status. Failure to comply will drop their ".ob" status and place them on the Pink Sheets which effectively has no requirements.

The reason we denote the OTC:BB & Pink Sheets as being part of the same group, however, is due to the distinctly different investment crowds that follow the corresponding companies traded on the exchanges. On the upper exchanges, there are analysts and there are "big money" institutional investors that dictate the daily market flow. To investors on these exchanges the term "penny stock" typically refers to low-priced companies that trade below $5, which is the default minimum price at which institutional investors will consider trading.

Traders on the lower exchanges, however, typically have a differing standard. A "penny stock" is a term that is typically referred for any stock that trades below $1 and practically any stock trading on the Pink Sheets. There are also "sub-penny stocks" that trade with prices below $0.01 and are often found on the Pink Sheets.

Lower exchange "penny stocks" take on significantly more risk and volatility than their upper-exchange counterparts. There is also a difference in investment mentality that results more closely represents gambling. Company fraud, excessive dilution, and likely occurrences of manipulation can be seen as the norm in these companies. Down here in this penny stock "Wild West," the widely-held adage of "buy & hold" is so commonly misused that those who fail to adapt accordingly often end up holding onto bankrupt company shells at their own expense.