Here are some of the typical characteristics of penny stocks: they are of very low value; highly speculative; never listed on any stock exchange; has very small market capitalization. Whenever you come across such stocks, you know they are penny stocks.
Though it is true that penny stocks have very low value yet it is difficult to confirm how low the value should be to be named as penny stocks, as opinions about stock value differ.
Penny Stocks Have Low Value – but how low is low?
While some say that when the price is below $5 per stock, they can be called penny stocks while some others hold the opinion that per stock value should be lower than $3 to be called such. Then there are people who claim that penny stocks are those whose value is below $1.
Penny Stocks – never listed on Stock Exchanges
Because you will never find them listed on stock exchanges, the penny stocks are highly speculative which makes investments extremely risky. When a stock is listed in the stock exchanges then there are some stipulations which the company has to comply with, which is not required for penny stocks. They are simply sold outside the stock exchanges which demands that investors ought to be very cautious while investing.
Penny Stocks Have a Low Market Cap- What does it mean to the investor?
To understand penny stocks better and its low market capitalization, you must know what market capitalization means. It is nothing but the market value of a single stock of a company multiplied by the number of stocks issued by the said company and available in the market. For instance, if a company has issued 10,000 stocks and the market value of single stock is $10 then the market capitalization of that stock is 100,000.
Thus if there is some stock which has a market capitalization of less than $300 million, then the stocks are called penny stocks. When the market capitalization figure is below $50 million, then the stocks are called nano-cap stocks.
Penny Stocks Are Highly Speculative – this makes it riskier
As you saw in the previous paragraph that when the market capitalization is below $300 and $50 million then the stocks are referred to as penny stocks and nano-cap stocks respectively. These low value stocks are considered to be highly speculative and risky because both the penny stocks and nano-cap stocks do not come under the regulatory control of stock exchanges though the SEC does oversee their trading and other market practices. Most conventional stock market traders usually avoid trading in these stocks because of their high unpredictability as well as high speculative nature.
