Penny Stocks

Definitions of what constitutes a penny stock vary.

Some consider any stock that trades under $5 a penny stock, but there can be very large companies that trade under that price. More accurately a penny stock should be defined by its market capitalization.

Most traders would consider a company with less that $500M would be considered a penny stock while larger institutions would consider anything below $2B a small cap or penny stock.

The main characteristic of a penny stock is that it can move very quickly. Penny stocks can hit +1000% gains in very short time periods, or thay can drop 99% overnight. This is because of the small market cap (the value of the entire company) and relatively low daily $volume.

That is not a typo, $volume refers to dollar volume, ie the amount of dollars changing hands.

1000 shares trading at $1 would be worth $1000.

1,000,000 shares trading at $0.001 (a sub penny stock) are worth $1000.

Always check the dollar volume, a common newbie mistake is to see big volume on a  penny stock and think it means something. Volume means nothing, its the dollar volume that is important.

A penny stock that has traded 5M shares for the day at a price of $0.01 had traded $50,000 worth of shares. That is chump change when compared to larger companies like Amazon (AMZN) which can trade in the $1B worth of stock changing hands on a busy day.

Since we define a penny stock by market cap and not price, you can find penny stocks trading at prices from $10-$4000, but still technically be considered penny stocks.

Dangers of Penny Stocks

As mentioned above, due to their small market caps and low daily volume penny stocks can be easily manipulated by pumpers and promoters. Any trader with enough money can go in and control the entire days buying or selling. A common trick is for a trader, or group of traders to buy large amounts of stock, then pump the stock on chat boards to try get the price higher, at which point they dump their shares at a profit.

Links:

- See video Penny Stocks - Anatomy of a pump and dump

- Our Penny Stocks Forum 

- Trading penny stocks : Useful information and Techniques

- What Penny Stocks Are you Watching Tomorrow? - Active penny stock pick thread.