| Ask any investor what a stock trading under $5 | | | | but rather makes its money on the spread, and |
| is and they will tell you it is a penny stock, | | | | by buying and selling at advantageous times. |
| microcap stock, or nano stock. These three | | | | There is no single price at which penny stocks are |
| terms are for the most part interchangeable. | | | | bought and sold, but rather there are a number |
| However the broader definition of a penny stock | | | | of different prices. The difference between the |
| refers to a business's aggregate value of its | | | | bid and ask price is known as the spread. The |
| outstanding common shares, are more commonly | | | | spread of many penny stocks are usually around |
| known as its market capitalization rather than its | | | | 25-33% but can often be 50-100% or even more. |
| stock price. However there is no set term that | | | | There are also always two bid and two ask |
| completely defines a penny stock. | | | | prices, these are known as the inside and outside |
| To calculate the market capitalization of a | | | | bid and ask. Keep in mind that it is the outside bid |
| company (the market cap) you must multiply the | | | | and ask that is of most interest generally. Penny |
| stock price of the company by the amount of | | | | stocks are also subject to mark up pricing. This is |
| shares that are outstanding. By carrying out this | | | | where a broker has held the penny stock in its |
| calculation you can find out what the total dollar | | | | account and has therefore taken some of the |
| value of all shares in the company are at any | | | | risk associated with market price fluctuation. |
| given moment in time. Penny stocks are not | | | | Although penny stocks are quite complicated and |
| traded on a stock exchange like other stocks but | | | | there are many problems associated with trading |
| they are traded in the over-the-counter (OTC) | | | | penny stocks as well as millions of dollars of loss, |
| market. For the trading of most stock an agent | | | | many companies still trade in them because they |
| will act on the investors behalf and arrange a | | | | can help for example, struggling companies just |
| transaction directly between the investor and a | | | | starting up. The best way of finding a good |
| third party. The broker then receives a | | | | investment is by consulting with your broker. |
| commission for facilitating the trade. | | | | However in the penny stock market be very |
| A large proportion of all penny transactions are | | | | wary of brokers who are only trying to sell and |
| charged by brokers as principle transactions. This | | | | may not have your best interests in mind. |
| means that the broker is not paid any commission | | | | |