Definition of a Penny Stock?

When you first begin to learn the stock market there are many definitions that can be confusing.  Often terms are used differently from book to book or website to website.  One of these definitions is the penny stock.  The penny stock can refer to any stock that is valued at less than $1 per share.  That would make the most sense.  Also, the people who trade stocks on large stock exchanges like the NASDAQ or NYSE refer to penny stocks as any stock that is worth less than $5 per share.

Other sources refer to penny stocks as companies that are small in size regardless of price per share.  This is often called market capitalization, which is the market value of the entire corporation.  Companies that are worth less than $200 million (sometimes $100 million) are sometimes referred to as a penny stock even if the price per share is $100.  The price per share will not matter.  The politically-correct term for companies with a very small market cap is “micro-cap.”

The last way a penny stock can be defined is as a stock that is traded over the counter (OTC) or on the pink sheets.  The pink sheets are an exchange that works with shares of companies that aren’t regulated by the Securities Exchange Commission.  The pink sheets have added a premier market for penny stocks that wish to submit information to independent auditors to add some trust to their financials and encourage investors instead of just traders.

While micro stocks aren’t your general stock market 101 starting point some experts do advocate allocation a small portion of your portfolio to micro-cap stocks (say, no more than 10%).  Indeed, micro-cap stocks do make up a small percentage of many total stock market fund’s stock holdings.   Micro-cap stocks can be used by the most conservative of stock investors to add some high risk high return elements to their overall trading strategy.  Also, tactics used with penny stocks can be uniquely applied to more regulated stocks to find new independent sources of ideas.