Differences Between Penny Stocks and Exchange Traded Stocks

| April 8, 2012 | 0 Comments

Penny stocks are some of the least understood aspects of the stock market. This is true both for penny stocks as a whole, and for individual penny stocks. Penny stocks, as a category of securities, do not include only stocks that trade near one cent; they encompass most stocks that trade below five dollars. But, dollar amount per share is not the primarily definitional factor. Penny stocks often trade on what is called the “pink slips”, a less regulated over the counter market.

Because penny stocks do not often trade on major exchanges, but are on the pink slips, they are subject to far fewer regulations. Exchange listed companies are required to file reports with the SEC, detailing profits, expenses and other financial data. These reports are then made available to the public, enabling anyone with financial expertise to formulate a detailed, educated guess on where that company is headed. Warren Buffet, before he was a billionaire, spent countless hours poring over such reports. By doing his homework thoroughly, he was able to accurately determine which stocks were worth buying, and thus made a fortune.

But, companies that trade over the counter are not required to file reports with such detail. It’s simply assumed that these companies are probably not big enough or successful enough to be significant. But this lack of concrete data means that someone looking to do homework on a penny stock will possibly be misinformed or under informed. Much of the “information” on which penny stocks to buy is in the form of press releases which have their source in the companies they cover. This can be seen as a conflict of interest by some investors.


Category: Investing in Penny Stocks

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