What Are Penny Stocks?
Ever since the stock market has been having so many problems, I have been hearing questions about penny stocks. While stocks like Citi and other banks may be in that range now, they aren’t really considered penny stocks. Here is what Investopedia says about penny stocks:
The terms “penny stocks” and “micro cap stocks” can be used interchangeably. Technically, micro cap stocks are classified as such based on their market capitalizations, while penny stocks are looked at in terms of their price. Definitions vary, but in general a stock with a market capitalization between $50 and $300 million is a micro cap. (Less than $50 million is a nano-cap.) According to the Securities & Exchange Commission (SEC) any stock under $5 is a penny stock. Again, definitions can vary, some set the cut-off point at $3, while others consider only those stocks trading at less than $1 to be a penny stock. Finally, we consider any stock that is trading on the pink sheets or over-the-counter bulletin board (OTCBB) to be a penny stock.
Penny stocks often seem like a good deal because they are so cheap. However, there are certain risks that come with investing in penny stocks. This is because there is a lack of information about them, no minimum benchmark standards and no solid history. Indeed, if you take $1,000 and put it in a penny stock of a company that tanks, you’ve completely lost your $1,000. Another problem with penny stocks is liquidity. These stocks don’t always trade actively, and you may not be able to find a buyer. Another problem is that penny stocks are more susceptible to the “pump and dump” practices of the unscrupulous.
If you invest in the right penny stocks, you can make a killing if a company manages to take off. However, you should realize that there is risk involved, and you should only use money that you can afford to lose when investing in penny stocks.
Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.
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