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What Exactly is a Penny Stock?

Jan 24, 2008
There are a ton of definitions out there for what exactly a penny stock is. The general accepted definition by both the public and the SEC is a stock priced under $5 a share. Usually a penny stock doesnt have much of a history behind it and the company as a whole is valued at $4 million dollars or less.

Many young companies start out as penny stocks and eventually climb out of penny stock status. Many other companies wait to go public until their stock is already worth more than the penny stock range. The difference usually lies in the need for investment capital.

For example, if you are young company worth $.005 a share right now but need some working capital in order to expand your business then you can go public in hopes of generation some additional capital. This can work out quite well for both the investor and the company if it is a promising stock.

Companies whose stocks are penny stocks can be a risky investment. The value of their stock is usually a combination of speculation and real futuristic analysis, sometimes more speculation. Also, a great company will not necessarily make a great investment.

Penny stocks do serve a purpose and should not be simply discounted as a gamble. They serve to help reputable yet financially needy companies expand and grow into a sizeable company that they would not have become otherwise without investor help. The best penny stocks also benefit wise investors looking for a higher rate of return that typically cannot be found in other types of stocks.

Of course you must be on the lookout for those who would use penny stocks for another purpose, to take your money and run. Opportunities where quick money can be made will always attract shady characters. So learn the ropes first and learn to recognize when someone is just trying to push you to buy a stock so they can quickly sell and run with the money.

When searching for a good penny stock to invest in it is best to follow the leaders. Go to websites and forums where people are staying on top of the next hot stock. Once again beware of those trying to make a quick buck. After awhile youll start to know a legitimate stock recommendation when you see one. Search phrases like best penny stocks or penny stock picks in Google will bring up a number of resources to look into.
About the Author
Scott Johns is the manager of web services at Buying the Best Penny Stocks and Picks .
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