Some define penny stocks as stocks that are trading under one dollar per share while some say they trade under five dollars. No matter what the exact definition is, I believe you get the idea that price per share of a penny stock is low. They are cheaper to buy compared to “normal” stocks, but the associated risk is also significantly higher.
They are not traded in the major stock exchanges in US such as NYSE, NASDAQ or AMEX, hence the reason that the daily trade volume is very low. Although, some penny stocks do have high daily trade volume. Penny stocks generally have low market capitalization and are traded over the counter (OTC) through service such as the Pink Sheets or the OTC bulletin board. Penny stocks are sometimes also referred to as microcap stocks, small caps or nano caps.
These are the things that comes to my mind when they say penny stocks.
1. There is a reason they are selling for pennies. The company is not doing well and it is moving towards bankruptcy. Investors do not expect any return or benefits from this company and if you invest here you will loose your money.
2. It is a new company which just began trading publicly. Since it is a new start up, it is hard to tell how they will perform. Before investing, you might look at their assets, both physical and intellectual to see what kind of services or products you might expect from them in the future. You might also check how strong their competition is and if you think they will be able to get a significant market share for their products or services.
3. The third and probably the best kind of companies to invest in are companies that are undervalued for no apparent reason other than the investors’ lack of trust and/or fear. For example, Citi (C) became a penny stock for a day or two because of the wall street meltdown. Those who were smart enough to load their bags that day saw an extremely generous return for their investment.
