Understanding penny stocks is an on-going quest. Some traders spend months and years in the effort to grasp the ins and outs of penny stocks. Let’s try a few basics to start.
First, while there is no official definition, there are three criteria that are generally used in attempting to define penny stocks:
1. price per share - stocks that trade for less than a certain amount, usually $5.00 or less per share;
2. the market the stock trades on - if the stock is traded on “Pink Sheets”, for example, it is considered to be a penny stock; and
3. market capitalization - market cap is the total trading value of a company and is determined by multiplying the value of each share of stock by the total number of outstanding shares.
In practice, however, the actual definition of a penny stock depends on who you ask. One common characteristic of all definitions is that penny stocks are high risk/high reward investments. Another common characteristic is that these stocks are often volatile and unpredictable, and something defined as a penny stock in the morning may not be a penny stock in the afternoon. Penny stocks can often undergo dramatic price swings based on the slightest provocation and can rise or fall 50% or more during a trading day.
There are many reasons to invest in penny stocks. As a trader, you may have limited capital or want an exciting investment without waiting years to realize profits. Traders generally hold penny stocks for shorter time frames, and attempt to pull returns from the stock in a matter of months rather than years. Sometimes a new investor will want to learn the basics of buying and selling shares using low-priced investments.
The bottom line is penny stocks are fun and exciting and that is why many people work at understanding penny stocks.
