Do You Know What A Penny Stock Is?
It seems like I eat, breathe, and live penny stocks. Every day Im focused on reading, researching, studying, and writing about these little gems.
And theres 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. Youll be high-fiving your buddies on your first double and youll take a special someone out to a fancy dinner the first time you rack up a 1,000% winner.
Penny stocks are exciting
And thats 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 theres 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 thats true. But as they say, theres more than one way to skin a cat and theres 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. Whats 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 heres 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 dont 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 theyre small enough to make a big move, but big enough that I dont need to worry about their survival.
Is mine the perfect definition of a penny stock? I dont know, but it works for me and it could work for you too!
Until next time,
Brian Walker
Category: Investing in Penny Stocks
