Do You Know What A Penny Stock Is?

| September 13, 2011 | 0 Comments

BrainstormingIt seems like I eat, breathe, and live penny stocks.  Every day I’m focused on reading, researching, studying, and writing about these little gems.

And there’s a reason for it… because you can make big money investing in penny stocks.

Your heart will never race faster than watching some small stock you scooped up for a few cents a share start to climb in value.  You’ll be high-fiving your buddies on your first double… and you’ll take a special someone out to a fancy dinner the first time you rack up a 1,000% winner.

Penny stocks are exciting…

And that’s probably why I get asked about them all the time.  One of the most popular questions I get is, “What is a penny stock?”

It makes sense, as there’s really no formal definition of a penny stock.  Many people assume a penny stock is a stock trading for a few pennies a share… or at least under $1.

Technically that’s true.  But as they say, there’s more than one way to skin a cat… and there’s more than one definition of a penny stock.

For example, the Securities & Exchange Commission has their own definition.  Here it is right from their website…

The term “penny stock” generally refers to low-priced (below $5), speculative securities of very small companies. While penny stocks generally are quoted over-the-counter, such as on the OTC Bulletin Board or in the Pink-Sheets, they may also trade on securities exchanges, including foreign securities exchanges.  In addition, penny stocks include the securities of certain private companies with no active trading market.

Looks like the lawyers were working overtime on that one.

Basically, the SEC defines a penny stock as any stock trading for less than $5.  What’s interesting is they make no adjustment for company size… so if Exxon Mobil (XOM) traded for $5 a share, it would be –  technically – a penny stock.

Some investors prefer the term micro-cap stock or small-cap stock.

Now here’s where the rules really fly out the window. 

Many investors consider companies with a TOTAL VALUE of less than $200 million to be micro-cap stocks.  As a result, you could have a company with a $50 stock price and still be considered a micro-cap.

With small-cap stocks, the numbers get even crazier.

I heard one portfolio manager say a small-cap stock is any company with a value under $5 billion.  I don’t know about you, but $5 billion sounds pretty big to me!

I must confess I have my own definition of penny stocks.  I like to focus on companies with a stock price below $10 a share… and a total market cap under $2 billion.  I tend to find a lot of nice little companies near the higher end of my range…

The nice part is they’re small enough to make a big move, but big enough that I don’t need to worry about their survival.

Is mine the perfect definition of a penny stock?  I don’t know, but it works for me… and it could work for you too!

Until next time,

Brian Walker

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Category: Investing in Penny Stocks

About the Author ()

Brian joins the Penny Stock Research team as a seasoned independent trader and financial analyst. Brian graduated with a B.S. from the University of North Florida and now resides in Scottsdale, Arizona. With a background in economics and statistics, he has a keen ability to uncover profitable and growth-focused companies. He has years of real life know-how in analyzing fundamental and technical data that gives him an edge drilling down on companies and financial results. With over 15 years trading experience, Brian has become an expert in the ever-changing equities markets. Today, he scours the markets hunting for penny stocks that offer low risk and high reward.