Making Money In Penny Stocks, Pink Sheets and Micro Caps Require Knowledge

Making Money In Penny Stocks, Pink Sheets and Micro Caps Require Knowledge

by James Brumley

The terms penny stock and pink sheet are like night and day as are bulletin board and micro cap. Unknowing investors often lump them all into one category and get into trouble or miss out on opportunities.

Even if you know a little bit about each term, its worth the time to memorize the distinctions between each. In trading, the more you know, the better investments you can make.

Penny Stocks ” As a general rule of thumb, any stock priced under $5.00 is considered a penny stock, though many traders dont consider a stock to be a penny stock unless its priced under $1.00. Either is acceptable, though one definition clearly expands the number of stocks that could qualify as penny stocks.

Though its slightly arbitrary, the $5.00 price level may have become the standard simply because thats the price under which many brokerage firms will not short a stock, or allow it to be margined. However, some brokerage firms have no price limit at all when it comes to shorting a stock. So, penny stocks can be sold short.

Its also generally true that penny stocks tend to be a pink sheet or a bulletin board stock (see below), though its imperative to understand that many exchange-listed stocks are also penny stocks. These low-priced exchange-listed stocks have at some point met the same requirements as some of the worlds highest-priced stocks. The low share price may be a temporary situation, not to mention an incredible investment opportunity. The size of the company (market cap) or its exchange has nothing to do with determining whether its a penny stock or not.

Pink Sheet ” A pink sheet stock is an equity that trades on the over-the-counter quotation system maintained by Pink OTC Markets Inc. Though this is generally considered to be the least desirable ” and most dangerous ” market to delve into, the stigma isnt always deserved.

The size of a company has no bearing on whether a foreign stock is listed in the U.S. market. Many times, they just cant do it for logistical or technical reasons. Therefore, dont use this as a barometer for credibility.

On that note, however, the potential downside of pink sheet stocks appears there are essentially no reporting/disclosure requirements for companies with stocks listed as pink sheet equities. In other words, you may not be able to view any audited accounting statements for these stocks. Many pink sheet companies can and do disclose every single financial statement they produce, however. For that reason, these stocks should be considered on a case-by-case basis.

On the other hand, if a stock trades on the OTC market, or as an OTCBB stock, you can be assured that these companies have met SEC requirements.

This may come as a surprise, but the bulletin board system is not the only over-the-counter game in town. Both pink sheet and NASDAQ markets are OTC markets.

Bulletin board companies dont consider share price when determining if a stock should be listed there, but market cap may be.

Dont just assume that all bulletin board stocks lack the stability of exchange-listed stocks. You might find some hidden gems that are stronger and more productive.

Micro Cap ” The standard definition of a micro cap company is any company with a market cap (issued shares multiplied by share price) of $250 million or less, though the number isnt set in stone. Note that share price has nothing to do with the determination; there are plenty of micro cap stocks with share prices well over $5.00.

Micro Caps can also trade on any exchange, so its status isnt based on whether its listed on the New York Stock Exchange. Its minimum requirement is only $25 million.

A Quadruple Summary

As you can see, penny stocks, pink sheets, bulletin boards and micro caps all serve different purposes and play the trading game uniquely. In this instance, semantics do matter. Becoming knowledgeable about specific definitions will go a long way in making profitable investments.

Whether youre looking for top stock picks and trading ideas among the penny stock world, bulletin board equities, or micro caps, youll find them at www.smallcapnetwork.com. We explore the information that really matters to find you the best of the best stocks, and to offer highly meaningful market commentary. Sign up for the free e-newsletter today.

About the Author:

James Brumley is an expert in the small stock arena covering penny stocks and small cap stocks for over 10 years now. Investors with an appetite for high risk/reward investment ideas should consider getting his free newsletter publication by visiting www.smallcapnetwork.com and subscribing.

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