Penny Stock Definition
While there is no universally-accepted definition of a penny stock, the term is usually applied to a stock that has a very low value, especially in relation to other stocks in an exchange. The term is generally considered derogatory, but the stocks may be considered good investments in some circumstances. Stocks that keep the status for too long may be dropped from a public stock exchange, but that depends on a number of different factors as well.
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Value
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The most important consideration in whether a stock is deemed to be a penny stock is the assessment of its value. Generally, stocks that trade below a value of $1 per share are considered to be penny stocks. In some cases, stocks that trade below $3 per share could also have the term applied as well. In more rare circumstances, stocks that have a value of up to $5 could also be coined as penny stocks.
Listing
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In other cases, the term could apply to a stock that is not carried by a major stock exchange and has a value of less than $5 per share. Major stock exchanges include the New York Stock Exchange, Tokyo Stock Exchange, NASDAQ and London Stock Exchange, among others. As with the term penny stock, defining a major stock exchange is somewhat subjective and could include stock exchanges in addition to the ones listed here.
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Delisting
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In some cases, to make sure the value of their product and reputation remains high, a stock exchange may take a penny stock off of its board, a process known as delisting. The policy at both the New York Stock Exchange and NASDAQ is for a stock to be delisted if the value drops less than $1 per share for a period of 30 consecutive days. Those must be trading days, so holidays and weekends do not count.
Alternative Exchanges
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If a penny stock does not meet the requirements for listing on one of these major stock exchanges, it still may be publicly traded. It simply must find a stock exchange that will accept it. Generally, these lower-valued stocks may be traded on lesser-known exchanges. These stocks are also known as over-the-counter stocks, or pink sheets, because of the color of paper they have been traditionally listed on by the National Quotation Bureau, now known as Pink Sheets, LLC, and operated by OTC Markets. Pink Sheets is the most popular outlet for these stocks.
Investments
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The term penny stock should not be confused with lower-valued stock. While it is possible to make money in penny stock investments, the practice is generally considered very risky. In addition to the unknowns, finding buyers for these stocks may be harder, leading many investors to only consider penny stocks with a higher daily trading volume.
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