Penny stocks are usually defined as shares of small companies that trade under $1 per share, although the SEC defines a penny stock as a security that trades under $5 per share. There are thousands or even tens of thousands of penny stocks trading on the stock exchange every day. Usually penny stocks trade on the over-the-counter market and are sometimes called “pink sheets” because before electronic trading, they would be printed on pink paper. Sometimes even stocks of large companies can lose their value and move into the penny stock territory and the last financial crisis shows many examples of such companies. Other times, a company that has just started and doesn’t have much in terms of assets and revenue can be listed as a penny stock.
Due to their low valuation, penny stocks can provide their investors with generous returns. At the same time, they are very very risky and investors can often find themselves scammed by fraudsters. In addition, many companies that list on the OTC market choose to do so because they don’t fit the requirements for major exchanges. OTC markets are less regulated and because there are so many companies, the authorities can’t control the information that these companies release, which is why the financial data and other reports issues by penny-stock companies can’t be trusted.
However, many penny stocks can also be found on major exchanges like NYSE and NASDAQ. These companies can be trusted more, due to more strict regulations and if you want to invest in penny stocks, you might want to start with stocks traded on major exchanges. Once you picked a stock, you should do your research to see why it is trading so low. It can be because the company has been launched recently and has yet to prove its worth, in which case it’s important to estimate the company’s potential. A penny stock can also be a so-called “fallen angel”, which had been trading higher, but then dropped due to some developments. These companies can also be a great investment opportunity in case the reason for their decline was just a bump in the road and the stock will most likely recover.
For a small or beginner investor who decided to take the chance and invest in penny stocks, the question is which companies to choose from. Since there are thousands of penny stocks, the research can be a very tedious process. One way to identify companies that are worth more attention is to look at the hedge fund sentiment towards them. Here’s where our research can come in handy. At Insider Monkey we analyze quarterly 13F filings of over 650 hedge funds and identify their collective sentiment towards thousands of stocks. Among the stocks that hedge funds are investing in, there are quite a few penny stocks and we have selected 15 penny stocks, in which there are at least 14 funds holding long positions that represented at least 20% of the company’s outstanding stock. Additionally, you can take a look at some penny stocks that hedge funds were bullish on last year.