What are Penny Stocks?

The term “penny stock” is in and of itself a misnomer because there actually is no generally accepted definition. However, there are at least 3 central criteria that various individuals and organizations within the trading community use to define penny stocks.

Penny Stocks Defined by:

1. Markets where Penny Stocks trade: Many traders believe that any stocks under $5.00 trading on non-traditional markets (i.e. the OTCBB, or the OTC, or the ‘PinkSheets’) are considered to be penny stocks.

2. Price Per Share: Some consider any shares that trade under a certain price to be considered penny stocks. For example, some institutions, including the SEC, deem all stocks that trade for less than $5.00 per share to be penny stocks.

3. Market Capitalization: A company’s size is determined by its market cap. Penny stocks typically fall in the range of Nano Cap, Micro Cap or Small Cap value, which again are approximations, but is a valuation varied between (less than) $5 million and $300 million.

Multiply the total number of outstanding shares by the current price per share (PPS) to calculate market cap. For example: 50,000,000 outstanding shares of XYZ at $0.20 cents each give XYZ, Inc. a market cap of $10 Million.

What we consider “penny stocks” to be are any stocks that are priced at $3.00 or less and are traded on the Over-the-Counter Bulletin Board (OTCBB) or PinkSheets markets, with a market cap generally lower than $1 million and no higher than $200 million.

→ Over the Counter Bulletin Board (OTCBB)

→ PinkSheets

→ NYSE Amex

→ NASDAQ Small Cap

Note: There is no physical trading floor or meeting place for this market. These securities are traded by broker-dealers who negotiate directly with one another over computer networks and by phone.

The price per share (PPS)

We view any stocks trading for less than $3.00 to be a penny stocks. In many cases, penny stocks stay true to their name as most do trade for less than $1.00, sometimes even for less than a penny.

Stock Tip: Some investors like the sub-penny to 10-cent range for potential “10-bagger” gains, while others shy away from them preferring penny stocks trading above 5 cents to $1.00 for safer 10 to 25% gain opportunities. Figure out your preference and don’t be afraid to mix it up.

Market Capitalization

We find that most penny stocks have less than $100 million in total capitalization, but this will vary from time to time, as any range below $10 million up to $300 million can play out.

A combination of the above criteria is a great way to do a quick check on any stocks you’re considering to trade in, and determine if it’s the right fit for you. The only characteristic that we feel holds true from one definition to the next, is that penny stocks are High Risk, High Reward Equities.