When online trading is done on stocks of low market value, the trade is called penny stock trading. The par value, book value and nominal value all mean the same, but none of these is the market value. The market value is the traded value of a stock, and when it comes down to a negligible amount, say a few dollars, it is called a penny stock. Stock Exchanges put its value sub $5. These are publicly traded shares but because of low value these are not traded in major stock exchanges. They are more prone to manipulation and scams.
Contrary to what the name suggests, you rarely find penny stocks worth exactly a penny. Generally, these stocks are of new companies, or those that have recently become public. Trades in penny stocks became popular because of their low value, and so only small amounts are required to trade in them. And if you are to lose money, it is only a penny or a few dollars, while the potential price rise is endless. This makes penny stocks a favorite of traders.
The market capitalization of the penny stocks is very low under $25 or $ 50 as some financial experts put it. The penny stocks can be traded “off market”. The trade then is less regulated, and is known as “pink sheet” trade. This makes penny stocks all the more risky. You should be aware of the risk involved in trading like this. As regards the penny stocks, there is lots of pumping and dumping, and so a stock that is traded as a favorite can vanish all of a sudden. When that happens, quick money is not made; instead it’s lost.
Some penny stock traders have made a fortune and like to nibble in these stocks by taking high risks for the sake of making quick money. They make a portfolio with these stocks, to set off losses against gains and at least even the two out, in the hope of making some big gains on any of the stocks in hand.
In the trading of shares every investor is guided by his conviction, more than anything else. This is the reasoning on which stock markets survive. Penny stock traders are no exception.
That was some information on how penny stocks, work, and why you see many experienced traders favoring them.