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Understanding the Penny Stock

Before you can begin investing in penny stocks, you do need to take the time necessary to find the right knowledge base for the process. That is, you need to understand what the penny stock is as well as how you can invest in them.

What Is A Penny Stock?

The first order of business here is to define just what the term; “penny stock” refers to. The bad news is that there are many mixed definitions out there regarding what this type of stock actually is. Therefore, you need to understand what things are considered to be penny stocks and then how to determine what the stock really is.

For example, a penny stock is a common term used to describe a stock that is inexpensive to purchase per share. This could mean: • A stock that is priced under one dollar per share
• A stock that is priced under five dollars per share
• A stock that is traded on what is called pink sheets
• Any over the counter, or OTC, type of stock

The United States Securities Division says that a penny stock is one that is valued under the value of five dollars and is traded either on pink sheets (over the counter) or on the NASDAQ.  

Value Counts

What you should know is that a company that trades with penny stocks is a company that has a value that is quite low in comparison to other companies. It should have a net worth that is four million dollars or less in net tangible assets.

In other words, companies that are valued higher than this amount, those that have more inventories, for example, are those that regularly trade on the stock market. Those companies often have a good amount of history being up and running.

In addition, they usually have what is called heavy assets. This means that the company has a good amount of real business as well as solid equipment and a good amount of inventory. They are usually set in what their business is as well.

You will find that these companies are those that have fewer inventories, less sales, and are more commonly unknown than those companies that are traded on the stock market regularly. Of course, that’s why they are called penny stocks. In addition, these companies generally do not carry a large amount of business from one quarter to the next. They may not even have defined goals or a solid business inventory as of yet.


One thing that makes penny stocks so, well, frustrating to learn about is that they are often called by various different names. You may have heard them referred to as micro stock, nano stock, micro cap stock, small cap stocks and many other names. If that sounds confusing, just remember that they are generally all terms that rely simply on the fact that the stock is priced below a dollar to five dollar range. In other words, penny stocks are quite affordable, low costing stocks. Where They Trade?

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