There is no official definition of penny stocks. Penny Stocks can be described as any stock share that trades under $2.00 while some will describe it as trading below $5. Penny stocks are considered as a high risk, high reward investments. It is quick to lose money on a penny stock investment. However, if your penny stock shares do begin to move, they can help you generate lots of profit, and that too within a short time frame.

In most of the cases, penny stocks are considered to have higher risk and higher potential rewards than any other investment. Their unpredictable value can be extreme, and their visibility of information and / or accessibility of operational results is usually very poor.

Very few financial professionals venture into the field of penny stocks because they are either reluctant or unable to do the work required to precisely predict what these highly explosive shares may do.

There are three different criteria which are used by various individuals and organizations in order to define penny stocks. What can be considered as a penny stock really depends with whom you are dealing.

Penny stocks can be best defined by:

1. Price Per Share: Sometimes any stock shares that trade under a certain price range are considered to be penny stocks. Take for example, the SEC describes all stocks trading less than $5.00 per share to be penny stocks. Different individuals and organizations have set their own cut-off.

2. Market the Stock Trades Upon: Some people describe penny stocks as those stocks which are trading on a certain market (ie- the OTC-BB, or the OTC, or the ‘Pink Sheets,’ or the CDNX).

3. Market Capitalization: Market cap can be described as the total trading value of the entire company. The value of each share of a stock, multiplied by the total number of shares outstanding, gives the market cap.
For example, 11,343,000 shares of ABC at $0.32 each gives ABC Corp. a market cap of $3,629,760 (11,343,000 shares times $0.32 per share = $3,629,760). That is kind of like saying that the company’s total value is 3.6 million dollars.

In few cases, organizations or individuals will treat any company stock beneath a certain market cap (for example, less than $10 million) as a penny stock. What may be a “penny stock” when the market open in the morning, might not be a penny stock after few hours of trading.
In few cases the definition of penny stock is generated by a combination of the above criteria. For example, any stock which is trading on the OTC-BB with a market cap of less than $20 million is considered a penny stock.