Book Cover
(Buy your autographed copy of "Understanding Penny Stocks" online right now!)

All About Penny StocksUnderstanding Penny Stocks

Did you know that Peter Leeds publishes his penny stock picks? Visit www.PennyStocks.com and learn how you can benefit from the Peter Leeds Penny Stocks service.

next page »« previous page

What Are Penny Stocks?

As promised, Understanding Penny Stocks starts from the very beginning.

For the purposes of Understanding Penny Stocks, I will treat any share that trades under $2.00 as a penny stock.

Strangely, there is no official definition for penny stocks.

There are three different criteria that various individuals and organizations use to define penny stocks. What is considered a penny stock really depends with whom you are dealing.

Penny stocks can be defined by:

  1. Price Per Share: Sometimes any shares that trade under a certain price are considered to be penny stocks. For example, the SEC considers all stocks that trade for less than $5.00 per share to be penny stock. Different individuals and organizations have their own cut-off.
  2. Market the Stock Trades Upon: In some schools of thought, any shares that trade on a certain market (ie- the OTC-BB, or the OTC, or the 'Pink Sheets,' or the CDNX) are treated as, or considered to be, penny stocks.
  3. Market Capitalization: Market cap is simply the total trading value of the entire company. The value of each share of a stock, multiplied by the total number of shares outstanding, equals the market cap.

For example, 12,343,000 shares of ABC at $0.29 each gives ABC Corp. a market cap of $3,579,470 (12,343,000 shares times $0.29 per share = $3,579,470). That is kind of like saying that the company's total value is 3.5 million dollars.

In some cases, organizations or individuals will treat any company beneath a certain market cap (for example, less than $10 million) as a penny stock.

Interestingly, using option 1 or 3, a company can have its shares change in price moment by moment, and may drop in or out of the definition of 'penny stock' over time. What may be a "penny stock" when the market open in the morning, may not be a penny stock by noon.

In some cases the definition of penny stock is generated by a combination of the above criteria. For example, any stock trading on the OTC-BB with a market cap of less than $20 million is considered a penny stock.

What is a Penny Stock?
Defined by price per shareI treat any share that trades under $2.00 as a penny stock. The Securities and Exchange Commission (SEC) considers any stock below $5.00 per share to be a penny stock.
Defined by the market the stock trades onSome markets that trade penny stocks include:
» Over The Counter (OTC)
» NASDAQ SmallCap
» Pink Sheets
» Over the Counter Bulletin Board (OTC-BB)
» Canadian Venture Exchange (CDNX)
Defined by Market CapitalizationStocks with less than $50 million in total capitalization can be considered penny stocks, but this market cap cut-off varies greatly from one organization's definition to the next.

It is worth repeating: I treat any share that trades under $2.00 as a penny stock.

I have specifically developed my techniques and trading methods to apply to shares less than $2.00 in price.

However, keep the other definitions in mind because what is and is not a 'penny stock' will depend on who you ask. The only common characteristic that we feel holds true from one definition to the next, is that penny stocks are high risk, high reward investments.

Penny stocks are high risk, high reward investments. It is easy to lose money on a penny stock investment. However, if your shares do begin to move, they can produce hundreds of percentage points of gains, and they often do this in only a short time frame.

Penny stocks are often very volatile, and just as often unpredictable.

In most cases, penny stocks are considered to have higher risk and higher potential rewards than most other 'more conventional' investments. Their speculative value can be extreme, and their visibility of information and / or accessibility of operational results is usually very poor.

Few financial professionals venture into the field of penny stocks because they are either unwilling or unable to do the work required to accurately predict what these highly explosive shares may do.

Or perhaps some big-wig investment types feel that low-priced shares are 'beneath' them. Hmmm. I could have retired when I was 26. Is that beneath them?

next page »« previous page