What do we mean by Penny Stocks? Well it varies depending on country and stock exchange. So, in the U.S. financial markets, the term penny stock commonly refers to any stock trading outside one of the major exchanges (NYSE, NASDAQ, or AMEX). However, the official Securities & Exchange Commission definition of a penny stock is a low-priced, speculative security of a very small company, regardless of market capitalization or whether it trades on a securitized exchange.
Whereas in the UK markets, penny stocks, or penny shares as they are more commonly known, generally refer to stocks and shares in small cap companies, defined as being companies with a market capitalization of less than £100 million and/or a share price of less than £1.
In France, penny stocks generally refer to risky stocks with a price of less than 1 euro.
Big Gains / Big Losses
In the UK, for example, there are many shares on offer at say 5p - it only needs a small movement for potential gains. For example, a small oil stock may find a new exploratory field. News leads to 1p increase in share price - a 20% gain.
Of course, the contrary is true - some bad news can lead to a drop in price, and a fat loss is the result.
Rising Markets
In a rising market speculation in Penny Stocks can be very profitable as the downside is less risky. Using Stop-Loss with such stocks can protect those of a nervous disposition! Penny Shares are popular because of the potential gains. It is not quite stock market investing for dummies, but in a rising market you can make a quick buck.
There have been many examples of Penny Shares providing enormous gains. Pentlands - a penny share many years ago - became a major player in the sports footwear market eventually acquiring Reebok. Their rise was spectacular!
