Three Definitions of Penny Stocks

Penny stocks can be a bit of a minefield, so if you are planning to invest in them (I recommend you don’t), there are a number of things you should be aware of. Not least of which is the fact that not all definitions of penny stocks are the same. Depending on your investment strategy, your trading perspective and the kind of risk ratios you are after, you can define penny stock trading using any one of three classifications: market capitalization; the actual share value, or the trading venue/exchange on which the stock is traded. It is important to be aware of all three classifications when discussing penny stock trading, to avoid any confusion.

1. The Market Capitalization of the Stock.

This classification comes down to one question. How much is the stock actually worth? If you are defining a penny stock based upon its market capitalization, then anything below $100 million can be considered a penny stock. Some analysts use the figure of $250 million, but that is getting more into micro-cap territory.

2. The Actual Value of the Share

This is probably the most common definition, i.e. if it is trading below one dollar per share, then it is automatically a penny stock (not, as some people seem to think, if it is trading at only one penny per share). If a stock is traded on the New York Stock Exchange or one of the other major exchanges and is trading below five dollars per share, than many consider it to be a penny stock too.

3. The Exchange on Which the Stock is Traded

This is also a common way of defining a penny stock. If it is traded over-the-counter (OTC) on the “pink sheets”, then most stock brokers would consider it to be a penny stock. Often, stocks that don’t meet the criteria of being listed on the larger, more traditional exchanges are listed on the pink sheets and traded over the counter and there is a healthy market for such shares.