What Are Penny Stocks?

A stock is known as a "penny stock" if it trades under a specific price per share. Some disagree as to where the cut-off is. Most financial experts describe a stock as a penny stock if it trades under $5 per share. However, many others believe the cut-off to be $1 per share. Some even set the cut-off very high at $10 per share but this is very rare. At any rate, the term "penny stock" is a controversial since it can trade for more than mere pennies.

You won't find many penny stocks trading on the big stock exchanges like the New York Stock Exchange (NYSE), The reason for this is because these major stock exchanges have strict requirements to be listed and most penny stocks do not meet these requirements. That is the reason, these lower priced stocks trade on boards that have a lot less stringent requirements to be listed. They are usually traded over the counter on the OTCBB or on the pink sheets.

Ocassionally, you will find stocks priced under $5 per share trading on the big boards. However, these are the exceptions rather than the rule and most of the time they are companies that were once more prosperous and have now fallen substantially. If a stock stays down for too long and/or sinks too low, it will end up being be removed off of major exchanges and demoted to the OTCBB or pink sheets.

Many penny stocks actually trade at a fraction of a single penny per share. For example, you may see a stock on the pink sheets listed at $0.001 per share. In this example, you could easily purchase 1000 shares of this stock for $1. For $100, you could buy 100,000 shares. This is one of the many reasons some people are so attracted to penny stocks - they can purchase so many shares for very little money.

Sometimes you will hear terms like nanocaps and microcaps used within the world of penny stocks. However, these are not the same as terms like nanocaps and microcaps that refer to the "market cap" of a stock which is the amount of money a company has on hand to spend. Although it is true that penny stocks normally have a low market cap, usually in the range of nanocaps or microcaps, it is not always true and market cap is technically not used to designate a stock as a penny stock.

Keep in mind that when trading these stocks you can make huge profits but you have to be careful about which ones you pick to trade. The downside of trading stocks on the OTCBB and pink sheets is that it is much more difficult to get the company information about a stock trading on these boards because the reporting requirements of penny stocks are so much lower. However, the upside is you are not competing with the major financial houses and the stock is much more likely to move up a lot faster than traditional stocks.