Penny Stocks typically trade at prices less than $5.00 per share. The stocks usually trade on stock quotation systems such as the Over The Counter Bulletin Board and OTC markets. But it’s important to know some basic terminology so you can find the best penny stocks to buy. For a better understanding of Penny Stocks review some of these most used terms:
Outstanding(O/S), Authorized, Restricted Shares:
OS is the number of shares held currently by the investors, including the restricted shares owned by the company’s major investors. And the authorized shares are the number of shares the company can sell to the investors.
Market Capitalization is the total dollar market value of the company’s total outstanding shares. And it is calculated by multiplying the number of the company’s outstanding shares with the current price of one share.
After subtracting the Restricted Shares from Outstanding Shares the resultant is know as Float which is publicly available for trading. Stocks with small floats will have more value in comparison to larger floats.
A stock split is when the company reduces the number of stocks by a fraction and increases the price of each share in the same proportion. For example, if a company declares one-for-ten Reverse Split, in this case, any investor having 10000 shares will reduce to 1000 and if its original price was 10 cents it will be increased to $1. In the case of penny stocks, R/S is not good news for the investors.
Reverse Merger (R/M)
It is basically the acquisition of a public company by a private company, making it easy for the other private company to invest in it bypassing the lengthy process of investing in a public company. It is good news for penny shares as it certainly positively affects the company’s share resulting in the rise in the share price. Reverse stock splits typically follow reverse mergers, so be aware of this.
Price Fluctuations of Penny Stocks
Penny Stocks offered on the market are often growing companies with some limited cash and resources. Penny Stocks have a higher level of volatility, therefore, there is a chance of higher potential reward. But the price fluctuation is normal, as prices change quite often. It’s important to know some of the basic terms so that you can accurately investigate companies that could be winning penny stocks as well.