Penny Stocks and Small Cap Stocks

What are Penny Stocks and Small-Cap Stocks?

There is no set accepted definition of Penny Stocks or Small-Cap Stocks. The following definitions are for the purpose of this web site only. Our definition of a Penny Stock is not dependant on the price at which it trades (although many refer to any stock under $5 as a penny stock) but rather the total market cap. We define a Penny Stock as any security trading with a market cap of less than one hundred million dollars regardless of which exchange it trades on. We also profile small-caps with a market cap of less than one billion. Our profiles may trade on any exchange to include the NYSE, Nasdaq, AMEX and OTC-BB. SmallCapReview strives to profile companies that otherwise would not get the exposure a larger cap with many analysts might.

Breakdown by market cap looks like this:

Micro Cap/ Penny Stock: Any stock with a market cap less than $100 million.

Small Cap Stock: Market Cap between $100 million and $1 Billion.

Mid Cap Stock: Market Cap between $1 Billion and $5 Billion

Large Cap Stock: Market Cap over $5 Billion. 

The "OTC" market

Penny stocks are for the most part not traded on a stock exchange, but are traded on the over-the-counter (OTCBB) bulletin board market.

The NASDAQ OTCBB system has listing standards that change from time to time and depending on the standards, there may be more or fewer penny stocks on the OTC. If you purchase a low-priced security that is listed on the OTC, it will have met certain minimum standards. In addition, many OTC prices are quoted regularly in newspapers and on the net, allowing you to follow the price of your security instead of forcing you to rely on your broker for all price information as may be the case with pink sheet stocks.

Legitimate Penny Stocks

There are many legitimate companies whose securities trade on the OTC at very low prices. Struggling young companies just starting out are perfect examples. Investment in such a company, held through the company's formative years, can pay off well. Such an astute investment requires three things: the ability to choose the right company, the capital to invest and hold the investment, and a little luck.

In order to choose the right company, you must know something about the business in which the company engages. You must be able to evaluate the feasibility of the company's business plan and the company's ability to compete in its field of endeavor. You must be able to evaluate the ability of the company's management to run the company. Finally, you must be able to evaluate the capitalization and cash flow of the company.

Decide your strategy before buying a stock. With the prolific increase in the number of day traders many stocks and the market in general have become very volatile. Subsequently, many will invest for short term returns. This is certainly your right and can be a profitable strategy. Alternatively,  if you find the right company, you must be willing to invest long term to allow the company to mature and for the stock to appreciate in value. Investment in "growth" companies is normally a long-term investment. Furthermore, you must have sufficient capital to be able to withstand total loss of your investment. Investment in emerging companies is always a high-risk investment.