What are Penny Stocks?

Penny Stock are Small!
Stocks are defined by their market capitalisation (number of shares in issue multiplied by the value of each share). A company with 1 million shares at $100 dollars per share has a market capitalisation of $100 million.

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Listed companies are divided into groups according to size. Large Caps are the top end of the spectrum (the Google's of the world), then the Mid Caps and the Small Caps. At the bottom end you have the Micro Cap firms which will generally have less shares in issue at a lower price per share (ie. Lower market capitalisation). Penny Stocks fall into this category and generally defined as being less than $5 per share.

It is important to know that this is a relatively ‘lose’ definition because even a large company could potentially trade for less than $5 but would not be classed as a Penny Share (some banking stock during the credit crunch reported huge stock losses but would not be considered a penny stock).

Penny Stocks are generally too small or do not meet all the rules and regulations (perhaps due to financial constraints) to make it onto the larger exchanges (the Nasdaq, the S&P etc). Consequentally it is harder for them to raise money to invest in themselves. They do not have media exposure, they might be new and do not have the history and are just too small to attract the interest of Global Investment Banks looking for companies to absorb billions of dollars of investment funds.

Traded on the ‘Over the Counter Bulletin Board’ or through the ‘Pink Sheets’ Penny Stock are a higher risk investment than say large cap stock. To list on the OTCBB companies have to report financial statements but there are no listing requirements like those found on the NASDAQ or New York Stock Exchange. Penny stocks generally trade less frequently and have larger bid-ask prices.

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