What Exactly are Penny Stocks?

Before even thinking of buying penny stocks it’s probably a good idea to understand what they are and how they’re viewed by the investing world. Three basic categories of penny stocks are used to define the actual words. Each one has a separate meaning with entirely different investment potential, risk ratios, and trading strategies. You might already know one of these meanings, however if you are doing research or talking about trading with another trader, you need to be careful because the information could be referring to an entirely separate meaning. Therefore, you must understand each meaning in order to make sure everyone is talking about the same one.

True Share Value – When people who do not know much about investing hear “penny stock” this is what they assume is the meaning. This is when a penny stock is valued under a dollar. Usually people believe that the stock is only valued at one cent. This meaning is not used very often in publications, probably due to the fact that it makes perfect sense. If a trader is speaking of a stock that is traded on a major market, such as the NYSE, then it is typically worth no more than $5.00 for each share.

The Stock Market Exchange – On occasion, and in particular with penny stock brokers, the meaning of penny stocks is derived from the market on which the stock is traded. The most prevalent penny stock exchange is Over the Counter, or the pink sheets. Basically, this means that the stock is not qualified to be on one of the more conventional markets. Pink sheets have started to examine penny stocks to make sure they meet their requirements for their exclusive penny stock market.

Market Capitalization – This is the final category of a penny stock and it is based on the company’s value. Usually, the companies have to be worth under $100 million dollars. The essential aspect is the company’s size, rather than the actual value and the price of each penny stock share.

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