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The NASDAQ refers to the National Association of Securities Dealers Automated Quotations exchange. It was the world’s first all-electronic stock exchange and is subject to the regulatory oversight of the Financial Industry Regulatory Authority (FINRA).
The term “penny stocks” traditionally referred to stocks trading under $1 per share, although some financial industry organizations and exchanges now consider stocks below $5 to fall into this category.
The Nasdaq lists many promising companies with stocks that qualify as penny stocks, as well as some stocks that have declined in value because their issuing company may be approaching insolvency. Penny stocks are also traded in other Securities and Exchange Commission (SEC) regulated markets like the New York Stock Exchange (NYSE) and the over-the-counter (OTC) market.
Overview: NASDAQ Penny Stocks
Penny stocks have a particular dynamic that sets them apart from their higher-priced counterparts. Generally, a company with a penny stock has either recently met Nasdaq’s listing requirements and had its stock listed at a low price, or its stock’s price has declined to the penny stock level as a result of a slide in business revenue or another adverse event that may hurt its future prospects.
Nasdaq listing requirements state that a stock must trade at $4 or higher and have at least 3 market makers for the stock. Still, the company may qualify for its stock to close under $3 or even $2 per share if it meets certain criteria.
Once the company fails to meet Nasdaq’s listing criteria due to a stock price decline, then its penny stock generally winds up listed on the “pink sheets” of the over-the-counter OTC Markets Group exchange (OTCQB) or the OTC Bulletin Board (OTCBB). This could also happen if the stock is undergoing delisting from the NYSE or the American Stock Exchange, Inc. (AMEX) because it fails to conform to those exchanges’ maintenance-of-listing standards.
A major advantage of trading penny stocks is their high volatility, although the extra risk involved can seem unsettling for conservative investors. For example, the frequency of stocks priced at $0.05 per share trading up to $0.10 is generally higher than a $5 stock rallying to $10. Investing in penny stocks can produce higher returns with less capital invested, and buying them involves limited risk since they cannot go below $0 in value.
Best Online Brokers for NASDAQ Penny Stocks
Some of the largest commission-free online stockbrokers make the best online brokers for Nasdaq penny stocks. Brokers that charge no commission for stock trades include Charles Schwab, TradeStation, E*TRADE, Robinhood and Fidelity. All of those stockbrokers can execute orders for penny stocks listed on SEC-regulated exchanges, such as the Nasdaq and the NYSE.
If you plan on trading more speculative OTCBB or OTCQB (pink sheet) stocks, then check with your broker to see if they can even execute your orders in the stock. You could also consider using TD Ameritrade as your stockbroker since they charge just $6.95 for a roundtrip (buy/sell) on the OTCQB exchange.
Intermediate Traders and Investors
Are Penny Stocks for You?
Few full-priced stocks can match the percentage returns potentially obtained by trading penny stocks. While our Nasdaq penny stock picks currently trade at higher levels to qualify for listing on that exchange, you can find interesting stocks trading under 10 cents per share that could easily rise significantly in value over time. Investing wisely in penny stocks could help you double or even triple your money.
The attractive risk-reward ratio, limited downside and low capital outlay involved in penny stock speculation might seem very attractive if you think you can pick the right stocks to invest in. Still, keep in mind that buying many of these low-priced stocks represents an extremely speculative investment, so your capital could be at risk if a company you invested in becomes insolvent.
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