Penny Stocks, Penny Stock, Pennystocks

Please note that we are not authorised to provide any investment advice. The content on this page is for information purposes only.

Penny stocks or small cap stocks refer to those stocks that trade at very low prices and are not quoted at any of the major exchanges, like the NASDAQ, NYSE or AMEX. A penny share can be defined in terms of the following:

  • Market capitalization: Penny stocks or nano cap shares are issued by those companies that have a market capitalization of less than £100 million or between $50 million and $2 billion.
  • Share price: The US Securities and Exchange Commission (SEC) confers a penny share status to those shares that trade below $5.In the UK, share price limit for penny stocks is less than £1 with an offer spread of more than 10%.
  • Listing services: Penny shares are listed on the Over the Counter Bulletin Board (OTCBB) or the Pink Sheets.
  • Risks Associated with Penny Stock Investments

    Investing in penny stocks is associated with high risks. The risk factors include:

    • Volatile prices: Variations in demand and supply of small cap shares result in extreme ups and downs in the quoted price. At times, it might be impossible to sell the penny share and the next day the stock might simply vanish.
    • Liquidity crunch: Penny shares are relatively illiquid because of their low credit quality.
    • Absence of accountability: The absence of accounting or monitoring standards to regulate penny share trading makes investors vulnerable to penny stock fraud.
    • Spamming: Investors are lured by e-mail spam propagating penny stocks. A study conducted by Oxford University and published in August 2006 revealed that 15% of Internet spam was related to penny stocks and that investors lost 8% of their investment within two days of investing.

    Tips for Small Cap Investing

    There are over 3,500 penny stocks listed on the Over the Counter Bulletin Board (OTCBB). To weed out substandard small caps from profitable ones, consider the following:

    • It is advisable to narrow down on penny shares that are priced within the range of $0.05 and $2.
    • Invest in nano caps trading at a daily average of 100,000 shares.
    • Single out penny shares that have a positive three-week and ten-week price delta, wherein the simple moving average (SMA)for nine days is higher than the SMA of an 18-day period.
    • Remove companies that are bleeding cash and yielding negative earnings per share.

    Evaluate these parameters over a period of time, such as every five days, before making your decision.

    About EconomyWatch PRO INVESTOR

    The core Content Team our economy, industry, investing and personal finance reference articles.