A penny stock is exactly what it sounds like—a stock that is sold at low prices ranging from 25 cents to 5 dollars. These shares may also be referred to as micro cap equities in some circles.
How Should You Define Penny Stocks
Of course, defining a penny stock is not always as simple as finding something with a low trading price. In fact, you’ll find that no one can quite agree on an exact definition. There are some other qualifications that are often used, however. These can include:
- The price per share (as previously mentioned)
- A market cap (this could be set as anything less than 50 million, the exact number is rather arbitrary)
- The market it is traded on (often penny stock are traded on obscure markets, although they can just as easily be traded on the well known markets as well)
Some simply agree to define a penny stock as a volatile short-term investment. If you choose to work with penny stocks the most important thing you can remember about them is not how to define them with an ever-shifting dollar amount. You will be much better served if you think about them in terms of their nature: they are stocks that offer a high risk, as well as a high reward and when they begin to move, they will do so quickly.
How Others Define Penny Stocks
Though it may not be important for you to set a hard and fast definition to penny stocks in order to work with them, you should make sure that you take the time to find out what the term means to any professionals that you choose to invest with. The key to succeeding with penny stocks is to do your research. This includes knowing what your broker is choosing to sell you under the name of penny stocks.