A company's market capitalization, or market cap, adds to its total market value. Multiplying the share price by the total number of shares in the market (outstanding shares) gives you the company's total market value. Penny stocks carry shares for companies with a market capitalization of less than $1 billion.
Penny stocks refer to a small market capitalization or small-cap. Many small-caps have prices that can be measured in pennies, hence the name penny stock. The price of a small-cap stock can have a wide range depending on the number of outstanding shares.
Micro-cap or nano-cap stocks, with market caps of less than $250 and $50 million respectively, trade for as low as $.0001. We call these sub-penny stocks. However, some micro- and nano-cap stocks also trade in the range of a dollar.
Penny Stock Investment Quality
Though inherently risky, trading penny stocks offers unique and exciting opportunities. While large stocks such as Google (valued at approximately $600 per share) stand in the forest like giant redwoods, penny stocks often spread upward in the market like vines in a matter of days. To double your money on a $600 stock, it must go a long way to $1,200. To do it in a stock that's $.01, it must only gain a penny to get to $.02. It requires a lot of money to move the price of an expensive stock, while a penny stock requires very little money to create a change in price.
Availability of information is one of the major differences between trading shares of penny stock companies and "blue chip" corporations with stable earnings and no extensive liabilities.
Penny stocks trade either on the Over The Counter Bulletin Board (OTCBB) exchange or on Pink Sheets. OTCBB stocks have information reporting requirements, but not as intensive as stocks listed on major exchanges. Pink Sheets stocks have no reporting requirements, as they often represent small companies' first attempts to become publicly owned. Traders find difficulties in searching for reliable information on penny stock companies since the amount of publicly available details is usually so low. This makes a fair stock evaluation difficult and internal and external influences may greatly affect these stocks.
For example, a company could be a fraud with a stock being promoted by a paid service in an effort to increase investor interest. Groups of traders could work together to convince others to buy while they sell into the resulting rise. These market-makers (professionals who act as buyers and sellers to maintain an orderly market) can also easily manipulate the price of a stock to a fairly drastic degree.
On the other hand, a solid small-cap company with a viable business model and realistic plan for the future can enter a public market with the intention to grow and become a victim of public bashing instead. As small-cap stocks are easily influenced, a negative public presence in chat rooms and on message boards can spread libel and hearsay about virtually any company that bashers choose or are paid to defame. No one can protect a company against bashing, which can drive the stock prices down. The Internet offers anonymity and it's virtually impossible for companies to stop bashing no matter how severely they inflict damage.Stockbasher.com is a useful website offering valuable information about bashers and how to hunt for and expose them.
Your Intentions
Like any investment, penny stocks demand hard work, discipline and patience. If you're looking for a safe and sound investment, don't try your luck with penny stocks. If you think of penny stock trading as a form of gambling, you may win a few rounds of profits, but won't succeed in the long run. On the other hand, with the right tools at your disposal, penny stocks can earn large returns in a short amount of time.
You must learn how the stock market works to increase your chances of capitalizing on penny stocks.
