Penny Stocks Key Terms

Understand the ins and outs of penny stocks

By Felicia R. Blue

Penny stocks are common stocks. However, they don’t trade on exchanges, such as NASDAQ. In fact, institutional investors tend to avoid them because they don’t have much value and there is not much information about them. Penny stocks are also highly volatile because the price can be extremely high one day and take a nosedive the next. However, investors are attracted to penny stocks because they’re cheap and promise much growth. Here are key terms to know about penny stocks.

Penny stocks

Penny stocks are common stocks that trade for less than two cents per share. Known for their low prices and small market capitalization, these stocks are not listed on the major stock exchanges, such as NYSE, Euronext or NASDAQ.
Try: Investopedia provides comprehensive information about penny stocks.

Over-the-counter bulletin

Over the Counter Bulletin Board (OTCBB) is a quotation service that consists of small companies that don't have the capital to be listed on NASDAQ or NYSE. Every company that is listed on OTCBB has to report financial information on a regular basis.
Try: Penny Sleuth provides a good history of how the OTCBB came to be. Scroll down to the Penny Stocks: OTC Investing segment.

Pink sheets

Like Over-the-Counter Bulletin Board (OTCBB), Pink Sheets is a central quotation and trading system that gathers and posts real-time market maker quotes for the OTC (over-the-counter) market. It's not an exchange, but more than 200 financial services businesses trade on this system. Penny stocks make up a large part of this trading system.
Try: Get more in-depth information on how Pink Sheets work by checking the website.

Volatility

Volatility is the comparative rate at which the security's price goes down or up. If the security's price drastically increases or decreases in a short period of time, then it's highly volatile. On the other hand, if it moves very little, it has low volatility. Penny stocks are highly volatile.
Try: Go to Best Way to Invest and read why and how penny stocks are highly volatile. Scroll down to the volatility section.

Liquidity

Liquidity involves being able to quickly convert an asset into cash without losing any value. Penny stocks are not known for providing liquidity because they don't have much value to begin with.
Try: Money-Zine discusses the relationship between liquidity and penny stocks. Scroll down to the "penny stocks can be speculative" section.

Manipulation

Manipulation occurs when investment companies, brokerage firms or owners cause the stocks to go up or down. This impacts the penny stocks' value. Penny stocks are prone to manipulation.
Try: AllStocks provides in-depth information about how people can manipulate penny stocks.