When investors are looking to buy penny stocks, it’s important to realize that there are three classifications of the penny stock that people mean when they use the term. They are each very different definitions and have completely different risk ratios, trading strategies, and investment prospective. You probably assume one of these definitions intuitively, but when you’re reading investment advice or speaking with another trader they may be talking about a different kind of penny stock. So make sure you know all of the definitions so that you can ensure everyone is on the same page.
Actual Share Value
This is what most non-investment people think of when they think penny stock. A stock that is worth less than a dollar is a penny stock. Some people literally think the stock is worth a penny or less. This is the least used definition in literature, probably because it makes too much sense. If the person is talking about a stock on one of the major exchanges like the NYSE then the price cutoff is usually $5 per share.
The Stock Exchange
Often online penny stock brokers will use the definition by which exchange the stock is traded on. The most common exchange for penny stocks is the pink sheets (Over the Counter). Essentially this is a catch all for stocks that don’t meet the qualifications of the more traditional exchanges. The pink sheets have begun to screen the penny stocks for some criteria for their “select” exchange of penny stocks.
Market Capitalization
The last classification of the penny stock is how much the company is worth. The market cap cutoff is generally less than $100 million dollars, thus the term “micro-cap stock”. I’ve also seen $250 million used a lot. The exact number doesn’t matter, but it shows that the size of the company is what’s important not the price per share.
Whichever form of penny stock you are referring to make sure you are clear with who you’re sharing your information with. Mistakes could be costly or at best waste a lot of your time.