Penny Stocks typically trade at prices less than $5.00 per share. The stocks usually trade on quotation systems such as the Over The Counter Bulletin Board and OTC markets. But it’s essential 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.
Penny Stocks & Market Capitalization
Market Capitalization is the total dollar market value of the company’s outstanding shares. And it is calculated by multiplying the number of the company’s outstanding shares by the current price of one share. In the stock market today, there are different market cap structures referenced by traders.
In most cases, penny stocks fall into categories like nano-cap, micro-cap, and small-cap. Though there are instances where you’ll see stocks under $5 with much larger market capitalization. here are a few market cap definitions to keep in mind:
- Mega-cap stocks: These are companies with market capitalizations above $200 billion. Apple (NASDAQ: AAPL), Amazon (NASDAQ: AMZN), Tesla (NASDAQ: TSLA), etc., fall into this category.
- Large-cap stocks: Companies with market capitalizations of $10 billion – $200 billion.
- Mid-cap stocks: Companies with market capitalizations of $2 billion – $10 billion.
- Small-cap stocks: Companies with market capitalizations of $300 million to $2 billion.
- Micro-Cap stocks: Anything over $50 million and below $300 million
- Nano-Cap stocks: Stocks with a market cap of $50 million or less.
Penny Stocks Public Float
After subtracting the Restricted Shares from Outstanding Shares, the resultant is known as Float, which is publicly available for trading. Stocks with small floats will have more value in comparison to larger floats.
Penny Stocks That Reverse Split (R/S)
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 a one-for-ten Reverse Split, in this case, any investor having 10,000 shares will reduce to 1,000, and if its original price were 10 cents, it would be increased to $1. In the case of penny stocks, R/S is not good news for the investors.
The risks of reverse merge stocks involve the potential for more dilution. In many cases, when there are NASDAQ or NYSE penny stocks, they typically are trading below $1 or at much lower prices for a reason. That reason usually involves heavy dilution as a result of multiple capital raising rounds. Once these stocks dip into the sub $1 range, they are at risk of being delisted. In turn, the company will effect a reverse stock split to decrease their outstanding share count, which then boosts the stock price (but not the value per share). What doesn’t usually change is the authorized share count, which is the total number of shares that a company is authorized to issue. It’s larger than the OS and essentially is the ceiling when it comes to issuing new stock.
This leads me to the point: when there’s a R/S, the O/S decreases but not the authorized shares. Therefore, it opens more runway to issue additional stock. Keep this in mind when researching penny stocks to buy that have or will do a reverse split.
A Reverse Merger (R/M) Of A Penny Stock Company
It is basically the acquisition of a private company by a public 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 a rise in the share price. Reverse stock splits typically follow reverse mergers, so be aware of this.
It’s also important to keep track of how and who funded the private or previous public company in the past. In many cases the face of a company may change but legacy investors remain for some time. If those investors were not beneficial to the former company, it’s a hard argument to make that they will be better with the new company.
Then again, in many cases, the reverse merger pays off old debtors for a clean slate on the new company. In that case, it could present fresh opportunities for investors and the market.
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 a higher potential reward. But the price fluctuation is standard, as prices change pretty often. It’s essential to know some of the basic terms to accurately investigate companies that could be winning penny stocks as well.