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Ella Williams

Investment Dictionary

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Penny Stocks


Penny stocks used to be described as stocks which price on stock exchange are lower than 1$ or 5$ (there is no officially approved norm). However, it is not very fair to judge a company for its share price on exchange because different companies have different issued shares number. It’s not a problem for every company to perform a stock split or reverse stock split and change a price of one share on a stock market nominally. 


But nor the stock split nor the reverse stock split does not change market capitalization of the company. But the market capitalization is the exact measure that shows magnitude of the corporation (to be more exact, enterprise value is more exact measure of magnitude for the company’s business). And market capitalization should be the main ratio to identify a penny stock company. 


It is hard to say how small market capitalization should be to recognize penny stock company, but you can read about small cap stocks and large cap stocks. Penny stocks should be smallest of small caps stocks. If institutional investor from USA would look for investments in some small emerging Europe country, almost every stock in a market would look as penny stock.


Penny stocks are less liquid and more volatile, that makes investment in penny stocks riskier than investment in regular stocks. Also penny stock often may be an object of dishonest market players’ manipulations. But normally very small capitalization stock can also be a good investment and generate higher return than the market average. But if you are preparing to invest in penny stocks, your analytical and valuation skills in investment finance have to be perfect.


Read more about penny stock investment.


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