Penny Stocks Defined

What are penny stocks? Well, that all depends on who you ask. We frequently need to clarify this issue among newer and inexperienced investors who are hopeful to get involved in the low-priced, highly speculative investment arena. Of course, the first thing you need to do is decide if investing in penny stocks is appropriate for you, given your risk tolerance and trading objectives. In general, penny stocks are mainly suited to the more experienced, but they do have a place for some who have limited funds and are willing to take a chance to make a big return. If you ask the man on the street, they'll tell you that penny stocks are shares that trade for less than a dollar. If you ask an investment banker, they might say penny stocks are those equities which are priced at $5 or less. They're both right. There are various ways to identify penny stocks, and they seem to be contrary to one another in many ways. Price per share: The Securities and Exchange Commission holds that penny stocks are any shares trading for $5 or less. Thus, a "small" company like Ford Motors was once among other 2 cent penny stocks when it was trading at $4.99 and had a market capitalization (overall total market value) of $16 billion. Meanwhile, other penny stocks were trading for pennies, with market caps closer to a few million dollars. The S.E.C. is actually fighting an uphill battle given their unpopular definition or penny stocks, because the vast majority of individual investors only call them penny stocks when they trade for less than $1. While price per share is the simplest and most widely accepted definition for identifying penny stocks, it is far from perfect considering the wide discrepancies in overall company size. Market Capitalization: Market cap simply means the total company value. How many shares are out there, and what is the price per share? 1 million shares total, trading at $3, means that the total company worth is $3 million given the current trading price. Various definitions ofpenny stocks put the moniker on any company with a market cap of less than $50 million. Meanwhile, they call small-caps any company from $50 million to $250, with varying definitions of mid-caps and large-caps going higher from there. While a useful method of taking company size into account, and thus avoiding calling Ford a penny stock, it becomes problematic in certain situations. For example, there are plenty of companies with an overall value of less than $50 million which are trading for $10 and $50 and even $100 per share. Are therepenny stocks trading at $100 per share? According to this definition, there are, although very few people would support this definition. Market the Penny Stocks Trade Upon: A third definition of penny stocks comes down to the market the shares trade upon. The Pink Sheets and Over-The-Counter Bulletin Board (OTC-BB) are considered markets forpenny stocks, while Amex, Nasdaq, and NYSE are generally not. However, there are many flaws in this approach as well. There are plenty of shares trading near the $1 mark, on both sides of the threshold, and certainly there are plenty that are beneath the S.E.C. definition level of $5. In addition, there are plenty of "penny stocks" trading for $50 or more on the Pink Sheets and OTC-BB, which would never be given that definition by anyone. Overall, there is no single universal definition for penny stocks. While a company trading for 25 cents per share on the Pink Sheets, with a market cap of $5 million, is certainly a penny stock, there are cases of others that don't fit the bill. For example, a $4.99 company on the Pink Sheets with amarket cap of $3 billion. Would companies like these be considered penny stocks? No chance. In the end, it doesn't really matter. Just know your investment style and risk tolerance, and decide in penny stocks make sense for you. Then, get involved with high-quality companies with great upside potential, and keep a watchful eye on them, just as you would if you were trading a Blue Chip like IBM or GE.