Penny stocks don’t typically come up in conversation on stock market news outlets like CNBC or Bloomberg TV. Micro-cap stocks are often viewed as higher risk than shares of more prominent, well-established corporations. These are more volatile, less liquid, and less established companies. They can even fall victim to scams, so getting the big picture on penny stocks is essential before you buy.
Penny Stocks Definition
The definition of the term “penny stocks” references companies whose share price is below $5 per share. Many traders will create their own definitions as one might think “penny” would include stocks under $1 trading for pennies. However, the broad awareness of small companies has included stocks under $5 in the definition of penny stocks.
What Are Micro-Cap Stocks?
You might also hear “penny stocks” in the same conversation as micro-cap stocks. While one doesn’t not define the other, there is a good chance that if you’re talking about stocks under $5, they’ve to smaller market capitalizations (though not always the case).
Stocks are placed into several categories. Market capitalization is one of these categories and takes into account the total number of outstanding shares and the price of a penny stock. Micro capitalization or “Micro-Cap” companies have a value between $50 million and $300 million.
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Anything less than $50 million is considered a “Nano-Cap” company. If you compare these penny stocks to any one of the companies in the Dow 30, for example, the latter has an average market cap of over $200 BILLION.
There are, of course other “caps” to consider. For the purposes of information, here are a few other market capitalization definitions:
- Mega-cap stocks: These are companies with market capitalizations above $200 billion. Apple (NASDAQ: AAPL), Amazon (NASDAQ: AMZN), Tesla (NASDAQ: TSLA), etc., fall into this category.
- Large-cap stocks: Companies with market capitalizations of $10 billion – $200 billion.
- Mid-cap stocks: Companies with market capitalizations of $2 billion – $10 billion.
- Small-cap stocks: Companies with market capitalizations of $300 million to $2 billion.
So if you hear someone talking about hot micro- or small-cap stocks, but you’re looking for actual penny stocks, you might want to take a closer look at which companies are being mentioned.
Are Penny Stocks Risky?
Yes, penny stocks are risky. But what makes them so risky? Many penny stocks are issued by startup phase companies with little to no track record. Sometimes they will have management in place that also has less experience running a publicly-traded company.
Another risk has to do with the market for penny stocks. Compared to popular public companies like Apple, Google (NASDAQ: GOOGL), or Netflix (NASDAQ: NFLX), penny stocks don’t have a lot of trading volume. This,…
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