A stock is categorized as a “penny stock” if it trades under a certain amount per share. There is disagreement as to where the cut-off is. The majority of financial experts classify a stock as a penny stock if it trades under $5 per share. However, many others consider the cut-off to be $1 per share. The Motley Fools set the cut-off very high at $10 per share but this is quite unusual. At any rate, the term “penny stock” is a misnomer since it can trade for more than mere pennies.
You won’t find many penny stocks trading on the major stock exchanges (the big boards) such as the New York Stock Exchange (NYSE), This is because these major stock exchanges have strict requirements to be listed and most penny stocks can not meet these requirements. For this reason, these lower priced stocks trade on boards that have much less stringent requirements to be listed. They are usually traded over the counter on the OTCBB or on the pink sheets.
Ocassionally, you will find stocks priced under $5 per share trading on the big boards. However, these are the exceptions rather than the rule and they are usually companies that were once more prosperous and have now fallen substantially. If a stock stays down for too long and/or sinks too low, it will usually be kicked off the major exchanges and demoted to the OTCBB or pink sheets.
Many penny stocks actually trade at fractions of a single penny per share. For example, you may see a stock on the pink sheets listed at $0.002 per share. In this example, you could actually purchase 2000 shares of this stock for a mere $2. For $200, you could purchase 200,000 shares. This is one of the reasons some people are so attracted to penny stocks – they can buy so many shares for so little money.
Sometimes you will hear terms like nanocaps and microcaps used interchangeably with the term penny stocks. However, technically these are not the same as terms like nanocaps and microcaps refer to the “market cap” of a stock which is the amount of money a company has on hand to spend. While it is true that penny stocks usually have a low market cap, usually in the range of nanocaps or microcaps, it is not always true and market cap is technically not used to designate a stock as a penny stock.
Just remember that trading these stocks can be quite profitable but you have to be careful about which ones you pick to trade. The downside of trading stocks on the OTCBB and pink sheets is that it is much harder to get good information about a stock trading on these boards because the reporting requirements to be listed here are so much lower. However, the upside is you are not competing with the big financial houses and the potential for the stock to move a lot and move fast is much higher than with more traditional stocks.