Penny Stocks Definition & Frequently Asked Questions
By: Joe Sirianni
Tags: How To, Stocks, Day Trading, Investing, Finance

What Is A Penny Stock? Are Penny Stocks Worth It? Penny Stocks & Day Trading Why Are Penny Stocks Risky? When Does The Stock Market Open? When Does The Stock Market Close?

What Is A Penny Stock?

A penny stock is a stock of a company that trades for less than $5 a share. While most some expect these to be smaller companies, there are many that have market caps in the billions of dollars. Many are also traded on major exchanges like the NASDAQ and New York Stock Exchange.

This is a welcome sign to clients of penny stock brokers like Robinhood & Webull, which limit their users to only main listings (for the most part). The general understanding for many novice traders is that penny stocks only trade Over The Counter or “on the OTC”. This just isn’t true and when you think of the definition of penny stocks, you should focus on the price, not on the exchange.

Are Penny Stocks Worth It?

To understand if penny stocks are worth it, you need to analyze your own approach to the stock market. Do you like higher risk trading? Furthermore, can you handle higher-risk situations? If you’re more of the school of thought to buy and hold, or invest in stocks, then penny stocks might be a bit intimidating.

The fact that traders can make money or lose money in the blink of an eye is what has polarized the investing public for decades. The difference here is that there are plenty of ways to make money with penny stocks. But it’s important to understand that treating penny stocks (or any stocks) as a lottery ticket is a surefire way to lose money in the market.

So before you ask yourself, “Are penny stocks worth it,” it might be best to ask yourself if you understand how to day trade in the first place. There are plenty of tools to use that can help you understand a number of strategies to utilize for consistent profitability in the market. At the end of the day, penny stocks are a great way to leverage small sums of money to benefit from volatility in the stock market. It just comes down to learning how to day trade in order to become consistently profitable.

Penny Stocks & Day Trading

This isn’t to say that you shouldn’t consider the exchange when it comes to day trading penny stocks or even investing in them. All exchanges have certain requirements of companies in order to remain listed on them. Sometimes it has to do with a minimum share price and other times it has to do with publicly available information. When it comes to OTC penny stocks, in particular, the listing requirements are less strict in comparison to those of NASDAQ and the NYSE.

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Let’s face it, day trading penny stocks is a simple task but not an easy one. Just simply thinking you’re going to buy at one price and sell at another overly simplifies everything going into the trade itself. Analyzing technical levels, dissecting news, reading filings, etc. It all goes into a trading thesis even before pressing “buy”. Aside from the listing requirements, those looking to day trade penny stocks should also be aware of the liquidity of certain penny stocks. This refers to how many shares are traded in a given session and how frequently the stock trades.

Generally speaking, the average penny stocks that day traders seek out are relatively thinly traded. This means that they aren’t actively traded every day. Some days there might be high levels of activity while other days there could be lower levels. Why is liquidity important? The simple fact is that less liquid stocks an be harder to exit when it comes time to taking a profit from your trade.

As a result of this lower liquidity, you might also be looking at wider spreads. What are spreads in stocks? This refers to the difference in price between the highest bid (the “bid” price) and the lowest offer (the “ask” price). An example of a “wide spread” is a stock that has a bid of $0.05 and an ask of $0.10. This is a 100% difference in price. If a trader buys penny stocks with a spread like this, the risk is that immediately after purchasing at the Ask, someone sells at the Bid, thus cutting your position value in half.

Why Are Penny Stocks Risky?

We talked about price risk, liquidity risk, and market exchange risk. But there are plenty of other risks involved in penny stocks. A lot has to do with things like valid, recent information as well as who’s involved in many of these companies. Insiders can many times be a reason penny stocks plummet.

When you’re talking about small companies like these, as well as ones with lower liquidity, it makes it hard to raise money. Many times we’ll see these companies raising millions of dollars to sustain operations. But the money may be “expensive.

This might include hefty discounts and certain conversion rights. When you’re talking about OTC penny stocks, for example, some companies might raise funds at as much as a 50% discount to the current market price. In cases like this we’ll see the price of a given penny stock drop dramatically. This is simply due to the fact that traders see where the company values its stock based on the current offering amount.

Furthermore, due to lax reporting requirements, the OTC is usually where you see pump and dump activity. These companies don’t need to disclose nearly the same amount of information as NASDAQ and NYSE companies. Also, since these are usually thinly traded, they fall prey to market manipulation. If you, as a trader, are on the dump-side of a pump and dump, it can result in unimaginable losses. There are instances of fraud on other exchanges as well. No matter what, it’s just another reason to do your research before placing any trades.

When Does The Stock Market Open?

If you’ve got a good hold of the risks and understand how to make money with penny stocks, it’s time to hit the market. But what time does the stock market open? The stock market opens at 9:30 AM Eastern Standard Time, every day that the market is open.

This signals the formal opening of the “regular market hours.” However, there are extended hours trading. Depending on your broker, you may be able to access pre-market trading of some stocks as early as 4 AM EST. You’ll want to consult your broker to gain specific information on accessing premarket trading options.

When Does The Stock Market Close?

Obviously, the other side of this is when does the stock market close? The stock market closes at 4:00 PM EST. That signals the end of the regular session. Just like premarket trading, there is also post-market trading. Again, this is something to ask your own broker about. But, generally speaking, post-market trading ends at 8 PM EST.

Summary