Back in the day penny stocks were stocks that traded for less than a dollar per share. According to current Securities and Exchange Commission definition, penny stocks now include shares that trade below $5. Not many penny stocks trade on the main exchanges like Nasdaq or the New York Stock Exchange. Most trade over the counter via the OTC Bulletin Board or through what are known as pink sheets.
Penny stocks are extremely risky. They lack liquidity, have large bid-ask spreads, small capitalization and very limited following and disclosure. A penny stock typically trades outside of the major market exchanges at a relatively low price and has a small market capitalization. These stocks are generally considered highly speculative and high risk because of their lack of liquidity, large bid-ask spreads, small capitalization and limited following and disclosure. They often trade over-the-counter through the OTC Bulletin Board (OTCBB) and pink sheets.
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Some Common Sense Rules
For investors who decide the high risk is worth it, experts suggest some common-sense rules before plopping down any amount of money on penny stocks.
First, ignore the success stories. There are plenty of examples out there, especially via email and on social media websites. Instead, experts say, concentrate on profitable penny stocks with solid earnings growth.
Second, don’t put much stock (pardon the pun) in tips. Tips from newsletters are designed solely to get you to buy stock – not to inform you.
Don’t hold stocks too long. Many traders expect to make a 1,000% return. That’s nearly impossible. If your stock is up 20-30%, sell. That’s a great return.
Seek high volume. By their nature penny stocks don’t trade at high volume. The higher the trading volume the easier it will be to get out of your position.
Stay away from large position trading. A good rule of thumb is to avoid trading more than 10% of a stock’s daily volume.
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Penny Tech Stocks To Consider
Ironically, although penny stocks are risky and technology can be riskier still, technology is fertile ground for young companies and the result is plenty of penny stocks in that space.
Four stocks that have shown potential to capture market share recently include:
Email provider, Zix Corporation (NASDAQ:ZIXIC), a company that focuses on secure messaging and markets itself to corporate and government entities. Shares tend to jump out of the penny stock category (over $5) from time to time. Market cap is just over $247 million.
Another company, Glu Mobile Inc. (NASDAQ:GLUUB) makes games for smartphones. The company’s strong cash reserves have helped it get out of debt. Average volume is about 4.3 million shares. The stock recently traded around $3.67.
Arotech Corporation (NASDAQ:ARTXB) combines drones and virtual reality and almost “can’t miss” scenario in tech. Arotech creates technology for the military and law enforcement. Average volume is around 177,000 shares with a market cap of $91.6 million. The stock recently closed at $3.50.
Alternative energy company, Plug Power Inc. (NASDAQ:PLUGC) provides fuel cell solutions to the material handling and stationary power sectors. Average volume is 4.7 million shares and the market cap is $549 million. Plug Power closed recently at $2.40.