Penny Stock Definition

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Penny Stock Definition

penny stock In the United States of America, a penny stock, also known as a micro cap equity, refers to a share in a company which trades for less than $5.00. While this is the official definition, and is used by the US Securities and Exchange Commission, generally every full service or discount broker, and the vast majority of analysts and institutional investors, there are other more loosely held criteria applied by the general public and most retail investors. In other countries the term may be used differently, without reference to US institutions.

Some of these alternative criteria include:

  • a price per share being less than $1, and as low as fractions of one cent
  • a market cap of less than $50 million or less than $25 million
  • trading on more obscure markets, such as the Pink Sheets

While such definitions are sometimes used by individuals and retail investors, the various and loose unconventional definitions enjoy no consensus or accuracy.

As well, there are many limitations with the alternative definitions, as they often contradict themselves. For example, there are many companies trading for only a few cents with market capitalization of hundreds of millions of dollars, or corporations trading on the Pink Sheets but having share prices of $50 or more.

The Markets

Small cap shares trade on the NYSE, Amex, Nasdaq, OTC-BB, and Pink Sheets. While there are fewer companies on the higher level exchanges, such as the NYSE, that trade for pennies, there are in fact a few. The Amex and Nasdaq have their share as well, but again, it is the minority compared to the more common Blue Chip and large cap equities which they house.

The OTC-BB and Pink Sheets host the majority of micro cap equities, and the majority of listed companies on their exchanges are sub $5. The expenses, listing requirements and regulations to be on the OTC-BB are much higher than that of the Pink Sheets. As a result, the caliber of companies is much greater on the OTC-BB than those traded on the Pink Sheets. In fact the majority of investors, even those who regularly deal with speculative equities, will not even trade in Pink Sheet companies.

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