What Are Penny Stocks?

If you’ve traded stocks, you most certainly seen those high flying percentage gainers scrolling across the ticker tape. You know, those 100%, 200% even 1000% gains in a day. Those are penny stocks. High risk, highly volatile, low float publicly traded companies that move up or down when looked at. Some times they are referred to as micro-cap or nano-cap stocks.


You have probably found yourself dreaming of what it would be like to catch one of those high flyers. Maybe grab yourself a 10 or 20 bagger. That is 10 time ROI in sometimes as little as a day or even hours. But guess what, while you see them on a daily basis, catching them at the right time is much harder than you think.   That is where the experts come in. Find yourself a great stock picker to follow and you could find yourself in penny stock heaven. Most who find their way to these small stocks quickly leave after facing a the harsh reality of losing all their money.  Getting good penny stock picks is key to day trading this area.

But before you dig into the under belly of the stock market, its best to understand the definition of penny stocks.

The SEC describes penny stocks as:

The term “penny stock” generally refers to a security issued by a very small company that trades at less than $5 per share. Penny stocks generally are quoted over-the-counter, such as on the OTC Bulletin Board (which is a facility of FINRA) or OTC Link LLC (which is owned by OTC Markets Group, Inc., formerly known as Pink OTC Markets Inc.); penny stocks may, however, also trade on securities exchanges, including foreign securities exchanges. In addition, the definition of penny stock can include the securities of certain private companies with no active trading market.

What Is a Microcap Stock?

The term “microcap stock” applies to companies with low or “micro” capitalizations, meaning the total value of the company’s stock. A typical definition would be companies with a market capitalization of less than $250 or $300 million. The smallest public companies, with market capitalization of less than $50 million, are sometimes referred to as ‘nanocap stocks.’ This guide will use the term ‘microcap stock’ to refer to both microcaps and nanocaps.

Microcap companies typically have limited assets and operations. Microcap stocks tend to be low priced and trade in low volumes.

Risk  While all investments involve risk, microcap stocks are among the most risky. Many microcap companies are new and have no proven track record. Some of these companies have no assets, operations, or revenues. Others have products and services that are still in development or have yet to be tested in the market. Another risk that pertains to microcap stocks involves the low volumes of trades. Because many microcap stocks trade in low volumes, any size of trade can have a large percentage impact on the price of the stock.

Wikipedia says:

Penny stocks, also known as cent stocks in some countries, are common shares of small public companies that trade at low prices per share. In the United States, the SEC defines a penny stock as a security that trades below $5 per share, is not listed on a national exchange, and fails to meet other specific criteria.In the United Kingdom, stocks priced under £1 are called penny shares. In the case of many penny stocks, low market price inevitably leads to low market capitalization. Such stocks can be highly volatile and subject to manipulation by stock promoters and pump and dump schemes. Such stocks present a high risk for investors, who are often lured by the hope of large and quick profits. Penny stocks in the USA are often traded over-the-counter on the OTC Bulletin Board, or Pink Sheets. In the United States, the Securities and Exchange Commission and the Financial Industry Regulatory Authority (FINRA) have specific rules to define and regulate the sale of penny stocks.

There are ways to win in the penny stock world. And it comes down to timing and knowledge. There are people who make a very good living trading these stocks under $5 also. Some offer a penny stock newsletters.   Picking the best penny stocks on any given day takes some skill. Skill that is developed over years of trial and error.

So if you decide you want to jump in, be sure you find a mentor, learn as much as possible, and know where to look for potential investments because you won’t find these companies being talked about on TV.

And as always, be extremely careful before actually committing money to any investment, you could seriously lose it all. Try paper trading first, and take into consideration the commission taken by your broker or online broker.

You could try out services like Penny Stock Egghead and Penny Stock Prophet.

What Do You Think?


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