Penny Stocks Is Not Always the Best Way to Invest
A stock market, stock exchange, or share exchange is an arrangement in which investors purchase shares of ownership in companies. These can include publicly traded securities on the major exchanges such as the New York Stock Exchange (NYSE) and the NASDAQ Composite. On these exchanges investors are able to buy shares directly from the company for a set price. A company’s stock may also be traded in a secondary market such as the Pink Sheets. A buyer’s market is one in which there are more buyers than sellers.
The primary goal of the Securities and Exchange Commission (SEC) is to regulate trading and maintain orderly bidding and asking prices for securities in the stock market. They do this through a variety of rules and procedures. Some of these involve controlling liquidity by making it easier for a security to be bought and sold quickly. Other rules limit the number of shares that can be traded per customer and institute minimum closing prices for securities. While these rules were created to serve the general public, the recent financial crisis showed that these rules are no longer necessarily beneficial to the average investor.
There are two types of over-the-counter (OTC) stock exchanges: Over the Counter Futures and Over the Counter Speculation. OTC futures are standardized markets where trading is done primarily through telephone communications. OTC speculation is an informal system of trading where companies trade their stocks for wagers. Many companies that offer OTC stocks use their own trading system instead of relying on centralized exchange systems. In some instances, companies also offer bi-lateral contracts that allow companies to make money off of stocks of other companies.
Over the counter stock markets are open twenty-four hours a day and seven days a week. This gives small, inexperienced investors the opportunity to purchase shares at peaks not available during traditional business hours. Additionally, during the stock market’s slump, OTC stocks are often the only way to gain exposure to the market at a reasonable cost. These same investors would be unable to obtain the same price or volume if they attempted to buy the same shares in a mainstream, over-the-counter market. In addition, OTC shares are often less expensive, offering penny stock investors the opportunity to purchase large amounts of shares at a fraction of the cost of larger companies.
Because these stocks are purchased as an Over the Counter item, it is difficult for most brokers to give advice to individual investors. Because the market is not well regulated, many brokers will charge high fees for advice. Many investors may decide not to trade OTC stocks because they fear high brokerage fees may prevent them from receiving a substantial profit.
On the other hand, there are benefits to investing in Over the Counter shares as well. Because the costs of trading are lower than those of larger companies, it allows investors to speculate on the health of the stock market and to create a part time or full time income from it. Since trading occurs over the internet and does not require the same overhead as trading on a major exchange, the majority of penny stocks will never receive a formal listing by the NYSE and will never be traded on a major exchange.