What Is a Penny Stock?

Many of us have heard of penny stocks, but what actually is one?

Well, there isn't actually a complete definition of what a penny stock is and the meaning differs by some individuals or organizations.

The Securities and Exchange Commission (SEC) defines the term to be stocks trading for less than $5 per share and regards them high-risk and speculative.

Some set the cut-off level at $3, while others consider only stocks that trade under $1 to be one. It all depends who you are dealing with!

So, lets take a look at a few elements of what some may determine as a one..

Price Per Share

Some consider stocks that trade below $5 per share to be a penny stock and some others consider stocks that trade below $1 to be one.

Exchange Stocks Trade Upon

Stocks trade on a variety of exchanges, such as NASDAQ, NYSE, AMEX, OTC (Over-the-Counter), and Pink Sheets.

Some consider stocks that trade only on the OTC (Over-the-Counter) or the Pink Sheets to be penny stocks. Despite the fact that most stocks might trade for under $1 per share on the OTC or the Pink Sheets, there are also some that trade higher than that. For example there are some that trade above $5 per share or more on the OTC or Pink Sheets markets.

Market Cap

Some consider any company beneath a certain market cap, such as a market cap under $50 million as a penny stock. But, a stock that has a market cap under $50 million may not be trading under $5 per share, some maybe trading much higher than that.

Sure, there are plenty of stocks that trade under $5 per share with a market cap under $50 million.

But, there might also be a stock that trades over $5 per share with a market cap under $50 million that maybe poised for massive growth. There might also be a stock with a market cap of $2 billion that trades for $.90 per share.

As you can see it is a bit difficult of putting an absolute definition of what a penny stock actually is.

For me I consider penny stocks to be shares that trade below $5 per share and must be under a certain market cap. But, that doesn't mean I just look for opportunities for stocks trading under $5 per share, I also look for stocks that may trade above that and are ready for massive growth.

I typically look for companies of the highest quality that are small or micro cap companies. These trade between 0.01 to $5 per share and trade on the NASDAQ, NYSE, AMEX, OTCBB (Over the Counter Bulletin Board), and Pink Sheets.

Visit my website for more information on penny stocks. Also, don't forget to signup for my FREE Penny Stock Newsletter to get my latest picks.