What Are Penny Stocks? A Simple Question With A Complex Answer…

| November 7, 2014

penny-stock2What Are Penny Stocks?

It happens all the time around here…

We get an email from a reader confused about why we write about a particular stock.

That’s not a penny stock they say… that company is too big… the price is too high to be a penny stock…

And it always leads to the same question… What are penny stocks?

Well today I’m going to answer that question… but first, let’s look at how some other people look at and classify penny stocks.

The Government’s Take:  What is a penny stock?

So this is interesting…

Go to the SEC website… www.sec.gov (you should be very familiar with the site as it’s a key source of information on stocks).

Anyway, type in the word “penny stock” in their search box and the very first thing that pops up is a site labeled “Penny Stock Rules”.

Here it is right from the site:

The term “penny stock” generally refers to a security issued by a very small company that trades at less than $5 per share.

So to the Feds, a penny stock is any stock below $5 from a very small company.

So that’s the Feds… what about the Wall Street titans…

A Mutual Fund Take:  What is a penny stock?

One of the most well known small stock mutual funds is The Gabelli Small Cap Growth Fund.  It was founded in October of 1991 and focuses on small companies – AKA Penny Stocks.

So what do they say?  Again, straight from the website:

…the Fund invests at least 80% of its net assets in equity securities of companies that are considered to be small companies at the time the Fund makes its investment. 


The Adviser currently characterizes small companies as those with total market values of $3 billion or less at the time of investment. 

So one of the oldest Wall Street players considers penny stocks to be any company with a market cap below $3 billion bucks! 

What about you?

What’s Your Take… How do you see penny stocks?

I’d be willing to bet that you see penny stocks as low priced stocks… so a company whose stock trades for $2 or $3 or less is a penny stock…

And there are some who believe that a REAL penny stock is only stocks trading for under $1.00.

Then you have those on the far end of the spectrum.  These investors see penny stocks as literally stocks trading for a penny or less.

To them, if they can’t scoop up 5 or 10 shares for a cent, it’s not a penny stock!

So here’s the answer to:  What is a penny stock?

A penny stock is any stock that you consider to be a penny stock.

You get to decide what a penny stock is and nobody can tell you you’re right… or wrong!

My Take On The Question:  What is a penny stock?

So here’s how I see it…

Regardless of market cap, a penny stock is really any stock that trades for less than $10 a share!

That’s right… $10 a share.

Why so much?

It’s because I’ve spent years in the market, and to me, a penny stock is a stock that screams extreme value.  It’s a stock that you can pick up on the cheap… and for less than $1,000 you can buy 100 shares of a stock trading under $10.

Now does that mean I only trade these High Priced Penny Stocks?

I like good deals as much as the next guy… so I go where I find the best investments.  I’m not afraid to invest in penny stocks trading under a buck… and I’ve made tons of money trading those stocks.

I will warn you though… the cheaper the stock price, the more risky the investment.

So I pay special attention to stocks trading for under $1.00 and for those that trade at fractions of a penny… they really go under the microscope.

What do you think?

Am I right on… or am I way off?

Let me know by responding to this email… or commenting on the website!

Profitably Yours,

Penny Stock Research

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Category: Investing in Penny Stocks

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