A Penny For Your Stocks - What Penny Stocks Are
"Penny" stocks (or "PS") is a term used by investors to describe stocks that are either low in value or are low in market capitalisation.
The definition will vary between people, but it is generally understood that they describe stocks that are not major stocks (ie AT&T, IBM, etc).
Another criterion that can also be considered is if it does not conform to the major stock market regulations.
Because of this, a PS is considered to be a much more risky investment, but one that can potentially pay off huge returns if chosen correctly.
Market Capitalisation - A Brief Intro Before we get into the details of penny stocks, you need to understand what the term "market capitalisation" (market cap) is.
Think of it as the total value of all the outstanding stocks.
For example, if a stock sells for $5 and there are 10 000 000 shares outstanding, then the market cap is $5 x 10 000 000, or $50 million.
This is important to consider, as the greater number of shares that are outstanding, the greater the stakes! If a large number of people or a large amount of money is involved with a certain stock, there will be more control on the stock.
However, if the stock is not traded on a regular stock exchange (ie the NYSE), it will not be under the regulatory controls that can protect an investor.
Therefore, you need to be forewarned! How much do they cost? This is a difficult question, as it is similar to the old question, "How long is a piece of string?" The question of how low you can pay for penny stocks is fairly subjective.
However, there are no rules when it comes to price, yet there are rules of thumb.
The main one is that a PS is any stock that is below a certain cut-off price.
This price is a matter of opinion.
Some investors consider any stock below $5 a PS while others consider anything less than $1 to be one.
It is a similar situation with market capitalisation.
A general rule to consider is that any stock with a market capitalisation less than $300 million to be a PS There are many websites around that deal exclusively with penny stocks, so visiting one of them may be very helpful to you.
However, market cap is a good way to define a PS, as there are many large companies that have relatively low share prices, but actually have a huge market capitalisation of more than $1 billion.
How low can you go? With the above definition of a stock having less than $300 million market capitalisation, a stock with less than $50 million can be considered to be a "nano-cap" stock.
With the prices of penny stocks being anywhere from a few cents to a few dollars, anyone can invest and potentially make a lot of money.
However, the risks are greater, and the likelihood that a penny stock will become worthless is great.
Does this mean you shouldn't invest in penny stocks? Absolutely not.
Many penny stocks can be from small mining companies who issue shares as a way of generating money for exploratory activities.
There have been many examples of small cap mining companies with shares of only a dollar or two suddenly strike a rich vein of gold or a major oil field.
Suddenly, their stock can go from a few dollars to over a hundred dollars or more almost overnight! There have been many millionaires made through investing in penny stocks.
However, a small cap mining company could also become bankrupt, and suddenly the shares are worthless overnight.
Can you take that risk? Penny stocks have been around for decades and have provided opportunities for small investors to make a huge return on their investments.
This is because the share price is generally fairly low.
Although people may think they are relatively safe because of the low price, they are generally much more risky than other stocks and there is the great potential that the shares will become worthless overnight.
In coming articles, I'll discuss other aspects of penny stocks, including what to look for in a penny stock and investing at the right time.
The definition will vary between people, but it is generally understood that they describe stocks that are not major stocks (ie AT&T, IBM, etc).
Another criterion that can also be considered is if it does not conform to the major stock market regulations.
Because of this, a PS is considered to be a much more risky investment, but one that can potentially pay off huge returns if chosen correctly.
Market Capitalisation - A Brief Intro Before we get into the details of penny stocks, you need to understand what the term "market capitalisation" (market cap) is.
Think of it as the total value of all the outstanding stocks.
For example, if a stock sells for $5 and there are 10 000 000 shares outstanding, then the market cap is $5 x 10 000 000, or $50 million.
This is important to consider, as the greater number of shares that are outstanding, the greater the stakes! If a large number of people or a large amount of money is involved with a certain stock, there will be more control on the stock.
However, if the stock is not traded on a regular stock exchange (ie the NYSE), it will not be under the regulatory controls that can protect an investor.
Therefore, you need to be forewarned! How much do they cost? This is a difficult question, as it is similar to the old question, "How long is a piece of string?" The question of how low you can pay for penny stocks is fairly subjective.
However, there are no rules when it comes to price, yet there are rules of thumb.
The main one is that a PS is any stock that is below a certain cut-off price.
This price is a matter of opinion.
Some investors consider any stock below $5 a PS while others consider anything less than $1 to be one.
It is a similar situation with market capitalisation.
A general rule to consider is that any stock with a market capitalisation less than $300 million to be a PS There are many websites around that deal exclusively with penny stocks, so visiting one of them may be very helpful to you.
However, market cap is a good way to define a PS, as there are many large companies that have relatively low share prices, but actually have a huge market capitalisation of more than $1 billion.
How low can you go? With the above definition of a stock having less than $300 million market capitalisation, a stock with less than $50 million can be considered to be a "nano-cap" stock.
With the prices of penny stocks being anywhere from a few cents to a few dollars, anyone can invest and potentially make a lot of money.
However, the risks are greater, and the likelihood that a penny stock will become worthless is great.
Does this mean you shouldn't invest in penny stocks? Absolutely not.
Many penny stocks can be from small mining companies who issue shares as a way of generating money for exploratory activities.
There have been many examples of small cap mining companies with shares of only a dollar or two suddenly strike a rich vein of gold or a major oil field.
Suddenly, their stock can go from a few dollars to over a hundred dollars or more almost overnight! There have been many millionaires made through investing in penny stocks.
However, a small cap mining company could also become bankrupt, and suddenly the shares are worthless overnight.
Can you take that risk? Penny stocks have been around for decades and have provided opportunities for small investors to make a huge return on their investments.
This is because the share price is generally fairly low.
Although people may think they are relatively safe because of the low price, they are generally much more risky than other stocks and there is the great potential that the shares will become worthless overnight.
In coming articles, I'll discuss other aspects of penny stocks, including what to look for in a penny stock and investing at the right time.
Source...