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For a stock to be a true penny stock, it has to have less than $4 million in tangible net assets and in addition the company will not have too much of an operating history.
If you want to purchase penny stocks, you have to realize that they are not traded on the stock exchange. The usual place to purchase cheap penny stock is in the over-the-counter market, also known as OTC. When you purchase cheap penny stocks, your broker or dealer acts as your agent. He arranges the transaction between you and seller. You pay the broker a commission for arranging the transaction for you. It can be possible at times for the broker or dealer to have the penny stock in his inventory, so you can purchase it directly from him.
There can be instances when the broker or dealer trades with you on his own behalf. When this happens, the broker becomes a principal in the transaction and you are not required to pay any commission in this type of sale. Instead the dealer makes money on the spread and by buying or selling when the prices are favorable, a system followed by any investor when it comes to buying or selling stocks.
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