Many people are confused by the exact meaning of penny stocks, particularly in a modern world, where they may cost significantly more than a penny/cent per unit. Also you’ll find that individual definitions vary, from broker to broker and among different investors.
Here’s a quick, easy burst of information, to help you start to get to grips with penny stocks. Hopefully this will give you some pointers for further exploration and research, rather than a definitive understanding.
Defining Penny Stocks
Penny stocks are the well known name, for what is more officially known as a micro cap equity. In its simplest terms, it’s a cheap stock, a share which trades at a lower value than blue chip, high cap items.
In the United States the SEC define a micro cap equity as a share which trades at a unit value of less than $5.00. This is an official definition, but there are other, looser definitions, which are used by investors and penny stock brokers, depending on their place within the penny stock market.
If you are talking to a broker or investor about penny stocks, they could be talking about share where the value, per unit, is less than a fraction of a cent. You may also be looking at stocks that are traded on more obscure markets, with caps of $25-$50 million, or less, depending on the definition applied.
Of course, you don’t have to be in the US, to be talking about penny shares, as they have parallels, all around the world, where cheap stocks and shares operate, in markets that support their trade. Top penny stocks can go on to be big name, blue chip stocks, as a company grows and the markets they trade on can change, over time.
As the definitions used are rather flexible, in many cases you will often find that there are some contradictions to be found, in the way that these shares are defined. For example, you can have shares that trade in obscure markets, with high unit costs. Similarly you may find companies with high market caps, trading at prices well below $5.00 per share.
What Markets Trade Penny Stocks?
Penny stocks can be traded on a wide variety of markets. In the United States, this can mean anything from the NYSE and NASDAQ to the OTC-BB and Pink Sheets. Penny Stocks are more likely to be found on the OTC-BB and Pink Sheets, as the larger exchanges tend to focus on higher market cap companies.
Small cap shares tend to be found where the regulations and fees for exchange listing are lower. The Pink Sheets have fewer restrictions than the OTC-BB, so you’ll find them in greatest numbers there. You’ll find that some brokers prefer not to deal with the Pink Sheets, but you’ll find plenty of OTC-BB Brokers, with a comprehensive list of OTC stocks available.
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