Penny Stock Investment

Hot small cap stock are high risk for small cap investors!

Penny stock investment is high risk because of the limited resources of small cap companies to withstand shocks.

In the U.S., a penny stock is considered to be a common stock that trades for less than $5 a share and are traded over the counter (OTC) through quotation services.

Small cap stock is a term used to describe these market minnows in other parts of the world.

I consider small-cap companies, to be those with a market capitalization (market cap) under $A100 M (million).

For larger stock markets, this figure has been stretched to $300M.

Market capitalization measures the size of a company and is determined by multiplying the number of shares that the company has issued by the current share price.

Market capitalization is easily found on online broker's websites.

Look here for an example of a penny stock picker site that also offers a penny stock newsletter.

I avoid the multitude of this class of companies, including the so called ‘penny dreadfuls' or penny stocks as good penny stocks are not easy to find.

It is difficult to undertake penny stock research as information on small cap companies is not always available.

A penny stock screener may help in this regard to generate penny stocks lists as they can be filtered by market capitalization, and then by other criteria.

These are companies whose share price can be measured in cents (or pennies). Penny stock status is determined by some in Australia as share price in cents, not by market capitalization.

Penny stocks are considered extremely speculative, particularly those that trade on low volumes.

They are less 'liquid' and hence they may be difficult to sell once you own them.

Penny stock investment may potentially result in total loss of capital.


As a new investors you may be lured to the appeal of penny stocks and small-cap stocks due to the low price and potential for rapid growth.

The attraction of these stocks is the belief that the top penny stocks may end up as another Microsoft.

However, good penny stocks are not easy to find and severe loss can occur. Many of this class of stock lose all of their value in the long term.

Why avoid penny stocks?

The truth about penny stocks is that the smaller the size of a company the greater the risk of it going belly up if something goes wrong.

Penny stock resources may not be sufficient to fix the problem, whereas large companies can lose millions of dollars and still manage to survive.

Also, because penny stocks are not likely to have an extended financial history, buying penny stock is not a value investing proposition.

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