If you’re new to the world of trading, then you’ve probably come across a lot of terms that you haven’t heard before. This may include the phrase penny stocks.
As a beginner, it’s easy to assume that these securities are just low-priced trading options – available for something close to a penny. However, the truth is that penny stocks are actually any publicly traded security with a low price point (under $5 usually), and a small-capitalization in the market.
These trading options are most commonly distributed my smaller, new companies that haven’t been able to establish a track record in their chosen industry yet. Depending on where you are in the world, and who you ask, the definition of penny stocks can differ. However, one thing you should always keep in mind is that like any trading option; there’s no one-size-fits-all strategy when it comes to working with low-price securities. While inexpensive stocks may well be a great option for some people, they also trade infrequently, which means that they lack liquidity. Additionally, lower levels of trading activity can also lead to higher bid-ask spreads, making it challenging to find the right price for your investments.
Where Did Penny Stocks Come From?
Low-cost securities have been around since the dawn of the stock market. These options have been available in one form or another since people started buying and selling parts of businesses and securities in Wall Street and beyond. Some companies even offered shares of their brands for low prices at the end of the nineteenth century.
Because they have high levels of liquidity and limited certainty when it comes to future predictions of performance, penny stocks are often associated with bad trading decisions. The US government even blamed these securities for the stock market crash in 1929. However, since the Securities and Exchange Act was established in 1934, the penny bidding environment for trading has become safer and more accessible. It was the mid-1990s by the time that this particular kind of trading began to explode more significantly than ever before. Specific brokers began to emerge that specialized in penny trading, and online platforms appeared where people could practice their strategies when investing in low-price solutions.
How Are Penny Stocks Established Today?
The vast majority of penny stocks come from companies that most investors have never heard of until they find them on the trading market. Like any other publicly traded asset, these investment options are created through an initial public offering, or IPO, issued by startups and small companies ready to make their first steps into the trading world. The process of establishing an IPO can be a lengthy one, but it’s also an excellent way for companies to gain much-needed capital.
For penny trades to be regarded as safe and reliable, they need to be listed on an official trading board, which requires companies to prepare registration statements or files that states the details of the offering. Once this documentation is approved, the business can begin to seek orders from investors, which makes their penny stocks available to purchase. The company can also file to have their stock traded in the OTC market, or listed on larger exchanges, depending on the nature of the business.
Shift Frequency © 2019 – A Brief History of Penny Stocks