BOWSER 101: Penny stocks and Microcaps

Pump-and-dump schemes featured

What is a penny stock? Is it a stock that literally trades for a penny? For pennies on the dollar? For a couple dollars a share? The term penny stock can be used rather loosely. The Securities Exchange Commission (SEC) defines penny stock parameters as an issue trading for $5 or less per share. Well that settles that.

The SEC, in its definition of penny stocks, goes on to say what we’ve all heard: penny stocks are inherently risky. Why? Because they trade infrequently. Because they have limited assets. Because they don’t generate the same financials as the bigger stocks. Whatever the case, the SEC requires brokers to adequately inform investors of the risks in penny stocks before they make a trade.

Here at The Bowser Report, we define a penny stock as a stock trading for $3 or less per share. Often times, we also use the phrase microcap stock(s). Though these two seem interchangeable, they are not necessarily the same. Penny stock refers to a stock’s price, and microcap stock refers to a stock’s capitalization (number of shares outstanding X current share price = market capitalization). So, a company with a low price can have a high market capitalization, and a company with a high price can have a low capitalization, all based on varying numbers of shares outstanding. For example, Sirius XM Radio Inc. (NASDAQ:SIRI) qualifies as a penny stock by both the SEC’s and our definitions. However, it is not a microcap because it has over 3 billion shares outstanding for a market cap of over $9 billion. Typically, the market cap range for microcaps is between $50 million and $300 million.

These stocks can trade on a number of markets, including the NASDAQ and the New York Stock Exchange (NYSE). They also trade on the Bulletin Board and other Over-the-Counter (OTC) exchanges. Because of their smaller share structures and other factors, they do typically trade at lower volumes on these markets.

While penny stocks seem to have a derogatory connotation depending on who you’re talking to, they are our specialty. We sift through hundreds of them each month to find the best ones to bring to you. While we know the risks of investing in these smaller stocks, we also know how to counter these risks. For example, diversification ensures protection from stocks that plummet by mixing them with stocks that will shoot up. All in all, we see the beauty in these beaten down securities.

For more information, consult the following SEC links:

SEC Penny Stocks

SEC Microcaps

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