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What Are Penny Stocks? An Easy To Understand Explanation

Updated on May 7, 2012

There are many different definitions of a “penny stock” It is generally thought of as a stock share that trades under a specific value. So, you will find many investors that will tell you anything under 5 dollars is considered a penny stock. While, others will tell you that they consider anything under 1 dollar a penny stock. So, the idea is not to get confused with the term “penny stock” because they can trade for more than just pennies.

Penny stocks are normally not traded on the major indices of the stock market. Places like the NYSE, NASDAQ etc. Have a certain threshold and requirements a company needs to meet before they can be listed on these exchanges. Most stocks that are “penny stocks” are considered real companies they are just unable to financially meet the requirements yet to be listed on those major exchanges. So a lot of the time, you will find lower cost stocks on others. They are usually listed on OTCBB which is an over the counter stock market or the pink sheet stock market.

When companies are not able to meet the strict requirements of trading on the NYSE or NASDAQ, they get, but on the OTCBB or the pink sheets. Many times you will still see quite a few companies trading under 5 on the NYSE, or the NASDAQ but they are still able to meet the requirements and are considered solid companies.

Many actual penny stocks are listed on the OTCBB or pink sheets but trade for less than a penny. You will notice a lot of companies’ shares trading for fractions of a penny. For example, some companies will trade at .002 a share. That means for 2 dollars you can get 2000 shares and so on. This allows people to buy many shares for extremely little cost, and if the company stock rises then they are able to sell for a enormous percentage profits.

There are other terms that you may see floating around the internet related to “penny stocks” like Nanocaps, micros caps. These terms do not actually refer to the penny stock open term above. They refer to the actual cash on hand the company on these sheets has to spend. It is usually quite little. But, the terms should not be used interchangeably with the regular term penny stock.

Trading in penny stocks can be immensely profitable if you get the right one. But, when you are searching for information on specific tock try not to be taken for granted when other people start “pumping” a stock. Make sure you get a hold of the company’s financial directors or financials before making any decisions. The reporting requirements of companies are much lower, so information may be nonexistent for those penny stock companies.

As with anything with penny stocks, you are essentially on your own. Many brokers will not touch them because they are such high risk investments. But, for the little amount of money you can put into a stock and watch it climb extremely fast it can be fun. Just always be careful in any investment, and make sure your information is reliable.

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