Strange Answers To The Question: What Is A Penny Stock?

| January 7, 2015 | 4 Comments

penny stockDo You REALLY Know What A Penny Stock Is?

What is a penny stock?  I get the question all the time… and at the start of the New Year, we always have a ton of new subscribers join our newsletter.

When I last checked a few hours ago, we had 3,073 new subscribers!

Let me first say welcome to everyone new!

Now the truth of the matter is, everyone here is interested in trading and investing in penny stocks… but there’s an argument in the industry over what a penny stock really is!

Do you know?

Believe it or not, there is no true definition of a penny stock.  So it can be whatever you want!

Everyone looks at it a little differently.  For example…

The Classic View Of What A Penny Stock Is

The classic or traditional view is simple… a penny stock is a stock that trades for pennies a share…

Technically, since pennies make up a dollar, you could argue all stocks are penny stocks because they can be quoted in pennies… but that’s slicing hairs here!

In reality, any stock below $1.00 a share is seen as a penny stock.

Does it really impact anything?

Well, yes it does.

I’ve heard of some brokers not allowing customers to trade penny stocks that trade below $1.00 because they deem them too risky.

All I’ve got to say is that’s a load of crap.

During the Great Recession in 2008 – 2009, there were tons of companies who saw their stock price plummet to the penny stock range.  If you weren’t able to buy them then, you missed out on huge returns!

Just look at Pier 1 Imports (PIR).

They sell home goods from retail stores… back in 2009, you could scoop up shares for about $0.10… they were truly a penny stock!

What is a penny stock? Pier 1 Imports (PIR) was a traditional penny stock.

It’s an incredible rebound they had… investors who scooped up those shares made a mint!

So, the moral of this story is… if your penny stock broker won’t let you trade penny stocks… find a new broker.

But that’s not the only kind of penny stock out there.

Nope.

The Government’s Take On What Is A Penny Stock…

The government’s always sticking its nose into everything… and penny stock classifications are no different.

The government says on their website (sec.gov) that a penny stock is “a security issued by a very small company that trades at less than $5 per share.”

Well, now we have a new term… “very small company”.

Is a small company a microcap stock?

What is a very small company… and if their stock sells for $100 a share, is it still a penny stock?

But now here’s where it gets weird…

The government goes on to say, “In addition, the definition of penny stock can include the securities of certain private companies with no active trading market.”

In other words, a private company can have a penny stock… even if there is no active market… think about this… if there’s no active market, how do you know what price the stock’s trading for?

So how do you know it’s a penny stock?

If you ask me, they seem to muddy the water more then give clarity… classic government!

So what do I think?

The Penny Stock Research Take On What Is A Penny Stock

Here’s how I look at it…

For trading purposes, a penny stock is anything below $10 a share…

Strange, right?

Well here’s my thinking…

First, when you buy stock, you normally buy it in round lots… or 100 shares each.  So at $10 bucks or less, 100 shares will cost you a $1,000 or less.  The cheaper the stock price, the more shares you can buy.

Second, many companies under $10 are smaller, and that means bigger growth.  Small companies have a long history of outperforming the markets because of their growth potential… and that’s what I’m after.

Third, many tier one markets like the NYSE and NASDAQ actually discourage the pricing of shares in pennies… that’s right… if  a stock price falls too low, the company can get kicked off the exchange!

So many companies who would have true penny stock prices (below $1) work to keep the price up through stock splits.

Look, at the end of the day, I don’t care what the price of a penny stock is… only that I make money from it…

So regardless of whether you think a penny stock is $1, $5, or $10… just keep trading!

Now here’s one last thought…

What’s A Penny Stock… Asia Edition

I’m going to leave you with one last thought about penny stocks.

When I was doing deals in Asia, the mentality of the markets is entirely different.  In Asia, the goal is not to have a high priced stock, but to make the stock easy to trade.

As a result, many companies actively worked to keep their stock prices under a few dollars a share!

Every time the stock price would march up and get over a few dollars, the management team would split the stock keeping the market price at just a few pennies.

This was especially popular in Singapore!

There was never a stigma about having a stock trade for a few pennies… and the Asian governments aren’t warning investors about the risks of trading penny stocks!

So now’s your chance… you tell me… what is a penny stock?

Please leave a comment on the website, or shoot us an email!

Good trading…

Brian Kent
Penny Stock Research

 

Note: Brian Kent has been trading the markets for more than two decades and now writes and edits for PennyStockResearch.com.  You can sign up for the penny stock research newsletter a trusted source for the truth about penny stocks! Sign up today and get a free research report – http://pennystockresearch.com/free-reports/.

 

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Category: Penny Stock Tips

About the Author ()

Brian Kent is the Editor for PennyStockResearch.com. He also pens Penny Stock All-Stars, an investment advisory focused on discovering small-cap and micro-cap stocks that are destined to become the market's next Blue Chips.

Comments (4)

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  1. carlos says:

    the$3.00 for under

  2. diane outlaw says:

    hello brian. my name is diane outlaw. (yes, outlaw.) 🙂 im no longer employed, and now living on a fixed income. do you have any suggestions – on purchasing penny stock, with a limited income? thank you, brian.

    • Brian Kent says:

      Hi Diane – Cool last name!

      You know, Penny stock trading can be risky… this is something you only want to do with money you can afford to lose. I’d suggest getting back on your feet first. then get a safety net… then some core investments… then look at penny stocks. Sorry, I know that’s not the answer you want, but that’s what you should do. It may take some time to get back up to speed, so during the wait, educate yourself about penny stocks and trading… read everything you can… stay on our newsletter, and paper trade… then when you have a pool of money to trade with you’ll be educated and confident!

      Good luck and keep us up to speed on how things are going.

      BRIAN

  3. Mike McNeely says:

    ABCFF

    I accidentally stubmled upon Abacus Mining (ABCFF). They are engaged in a mining operation in Alberta, Canada where they are extracting Gold, Silver and Copper. Their price tag is only $.027, a discount to say the least. Do you know about this company, and is the share price falling towards bankruptcy or do you see the company rebounding?

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