There are numerous characteristics used to define a penny stock. Price and market capitalization are two of the most common metrics. Market capitalization is used to determine the overall value of a company. One investment strategy is to look for companies which are undervalued compared to its peers. The hope is that the company’s value will be realized sending the share price higher. The nomenclature used with regard to market value can get a confusing because terms like micro cap, nano cap and penny stock are often used interchangeably for a given level of market value.
Micro Cap Stocks Definition
Micro cap stocks are stocks with a low market value. Micro cap is short for micro capitalization and this refers to the value of the company. An easy way to find the value for a company is by retrieving a stock quote through Yahoo Finance. Listed among the stock details is the market cap. Market cap or market capitalization is the share price multiplied by the number of shares and represents the total value of the company’s stock. The SEC website defines a micro cap stock as anything under $300 million. Nano cap stocks are valued at less than $50 million.
Penny Stock Definition
Penny stocks are often defined by a stock’s share price and as mentioned before on this website the SEC defines a pennystock as below $5 per share. There are many other price points (e.g. less than $1.00) used to define a penny stock. Penny stocks can also be defined by market cap and this is when the definition of penny stocks and micro cap stocks overlap because a penny stock is usually defined as a stock with a low price and low market capitalization.
Overlapping Definitions of Microcap Stocks and Penny Stocks
These two definitions now allow the examination of how microcap stocks and penny stocks are in many ways the same but may also differ. The SEC uses similar criteria in their definition of penny stocks and microcap stocks. These criteria include limited operations, low trading volume, listed on the OTC Bulletin Board, limited trustworthy company information, and susceptible to manipulation by promoters. In many cases a penny stock with a low price has a low market capitalization and therefore can also be called a micro cap stock. However, this is not always the case.
Large Cap Penny Stocks
When looking for penny stocks to watch be on the lookout for large companies with a low share price. There are many cases where a stock has a penny stock price but have a market value much greater than $300 million. A couple of good examples include Citigroup and Zynga. During the stock market plunge of 2008 and 2009 Citigroup’s share price went below $1 per share all the while maintaining multi-billion dollar revenues and market capitalization. More recently Zynga has traded under $5 per during 2013 all the while having a market cap in the billions of dollars and trading on the NASDAQ.
The opposite is also true, but much rarer, where a company with a large stock price will have a low market cap. Therefore, just because a company has a share price of less than $5 or even $1 with a microscopic valuation doesn’t mean it is not a worthwhile investment and among the best micro cap stocks to buy. In some cases, companies with large market capitalization, trading on a major exchange will have a low price. When creating your penny stock watch list one strategy to employ is to look for low priced stocks that have a large market capitalization trading on a major exchange. This may reduce some of the risk and hopefully increase the chance for reward in buying penny stocks. On other hand you can screen for micro cap stocks found on the NASDAQ, where the listing and reporting standards are higher.