Posted on 26 August 2012.
Although penny stocks are bought and sold on a number of exchanges, trading NASDAQ penny stocks has become particularly popular over the last decade. This is because NASDAQ penny stocks carry much less risk than other types of penny stocks. Essentially, a penny stock is any stock that does not cost more than five dollars per share. While low cost stocks can qualify for regular market listing, many do not. They may not have the financial history required by the major exchanges, they may not have enough market capitalization or they may not be registered with the SEC.
Penny stocks that do not qualify for regular market listing can still be listed on the over the counter, or OTC, market. OTC stocks carry a lot of risk, but they also have a lot of room for appreciation. Although NASDAQ is technically an OTC market, it has much higher standards than OTC listing services such as the Pink Sheets or the OTCBB. Even the smallest stocks must meet certain guidelines to be listed on NASDAQ. They must meet the minimum requirements for market capitalization, they must have a significant financial history and they must be registered with the SEC. Because of these requirements, trading NASDAQ penny stocks is much safer than trading other OTC stocks.
It is easy to say that trading NASDAQ penny stocks is safer, but it is also important to understand why the NASDAQ requirements lower the risk associated with penny stocks. The average OTC stock is very difficult to research. It has no financial history and both the company and product it represents are untested. Most penny stocks fail, leaving investors with nothing. NASDAQ stocks, on the other hand, are required to have a certain amount of financial history. This means that while some stocks will inevitably fail, researching each stock is easier. When trading NASDAQ penny stocks, it is much easier to single out the winners from the losers.
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