A penny stock is a term used for a stock that is trading for under five dollars per share and is traded through markets such as the OTC Bulletin Board or the Pink Sheets. Penny stocks are considered by many as high risk investments. The exchanges on which penny stocks are traded have less regulatory reporting requirements. Due to the lesser reporting requirements and the associated cost of such requirements, many smaller companies choose to trade on the Pink Sheet or OTCBB exchanges rather than their larger counterparts.
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Many investors choose to trade penny stocks due to their low price and potential for sudden growth. Since the companies often experience rapid changes in supply or demand (often due to small public floats) penny stocks can be very volatile. Penny stocks are rarely seen by investors as a long term investment; instead, many short term traders often buy and sell the stock on the same day or "swing trade" the stock over a one to two week investment period. Quite often penny stocks are only traded for a short period of time due to the short periods of liquidity.
Companies traded on the OTC Bulletin Board or the Pink Sheets have fewer regulations. Stocks trading on these markets do not have as strict regulations on their filings with the SEC. Additionally, companies that fail to meet the rigorous reporting standards on larger markets are de-listed and often list on small cap markets.
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