What is a Penny Stock?

Penny stocks consist of corporate stocks that have a very low cost — maybe not just a penny, but quite low compared to the stocks of most listed companies. Many of these stocks trade in the over-the-counter (OTC) markets, which means that they trade through a network of brokers and dealers and not on a centralized stock exchange. With that noted, some stocks that are technically penny stocks can be found listed on major exchanges.  

What is Considered a Penny Stock?

The current correct definition of a penny stock is any stock priced under $5. Some stocks lose their value when the issuing company’s business declines or it approaches bankruptcy. They sometimes lose enough value to eventually become penny stocks, which is the reason that some penny stocks trade on major exchanges. 

Marathon Oil (NYSE: MRO) is a good example of a stock becoming a penny stock. It was trading at over $13 per share in December 2019, but the stock since fell to hit a low of $3.02 in March 2020 before bouncing somewhat to currently trade at $4.23 per share.

MRO continues trading on the New York Stock Exchange (NYSE) because it has not yet met the delisting criteria. Stocks that do meet that criteria will move from an exchange to the OTC Markets.

While Marathon Oil is just one example among many penny stocks, the majority of them are issued by small or new companies without a track record to generate investor interest. Such stocks could still have considerable upside potential depending on the company’s product or service.

What Penny Stocks to Buy

You can find 3 penny stocks of companies in the communications, mining and pharmaceutical fields below that show considerable promise. Some of them have even been accumulated by major hedge funds. 

1. Orbcomm Inc. (NASDAQ: ORBC)  This penny stock currently trades at the $3.75 level and was recently shown to be held by 19 hedge funds. The company specializes as a provider of industrial internet of things (IoT) and machine-to-machine (M2M) communications solutions. Rochelle Park, New Jersey-based Orbcomm offers multi-network connectivity with cutting-edge devices and applications for governments, as well as for the transportation and distribution, oil and gas, maritime and heavy equipment industries.  
2. Avino Silver & Gold Mines Ltd. (NYSE: ASM)  A Canadian mining penny stock that traded as low as $0.39 in May 2020 and has since tripled to its current level of $1.08 per share, thanks in large part to the recent rally in the gold market. The company owns an interest in 42 mineral claims and 4 leased mineral claims in Mexico and Canada, and its stock could see further upside if the rally in the gold market continues. 
3. Lipocine Inc. (NASDAQ: LPCN)  Based in Salt Lake City, Utah, Lipocine is a specialty pharmaceutical company that focuses on men and women’s health. Its lead product candidate is TLANDO, an oral testosterone replacement therapy. The company also has an oral hydroxyprogesterone caproate product called LPCN 1107 that is used for preventing preterm birth from reoccurring. The company’s stock traded as high as $18 per share in 2015 but then fell to a low of $0.301 in November 2019 and has since rallied to $1.42.  

List of Best and Worst Penny Stocks Right Now

The best penny stocks generally have a solid balance sheet and either already show a profit, or will potentially show profits in the near future. Also, many prominent foreign companies list their stocks on the OTC markets to avoid the steep listing fees charged by major U.S. stock exchanges. 

Foreign companies’ stocks that trade on the U.S. over-the-counter market include the Japanese holding conglomerate SoftBank (Pink: SFTBY) that has a market cap of over $94 billion and Nestle SA (Pink: NSRGY) with a market cap of $345 billion.  

The worst penny stocks typically don’t disclose their finances to shareholders and don’t have the obligation to report their earnings or other financial aspects of the company. These stocks trade on the Pink market, and can often be risky investments. 

Pink Market Stocks

The Pink market — formerly known as the pink sheets because quotes were printed on pink paper — is operated by OTC Markets Group, which also operates the OTCQX and OTCQB markets. 

Companies listed on the OTCQX and OTCQB markets are obligated to provide the U.S. Securities and Exchange Commission (SEC) with key financial information and be current on their disclosure, while companies listing their stock on the Pink market have no obligation to file with the SEC or to disclose their finances to investors. 

How to Quickly Identify a Penny Stock

The general criteria for a penny stock is the stock of a very small company trading under $5 per share. This makes identifying penny stocks pretty easy, although some exceptions do exist as mentioned above. 

Sorting penny stocks into different categories can further narrow down your choices when doing research. For example, you might look for stocks under $3 per share, penny stocks listed on major exchanges, or penny stocks traded on the Pink market.

Best Online Brokers for Penny Stocks

Many online brokers now offer their stock brokerage services free of charge for stocks listed on major U.S. stock exchanges. Due to liquidity issues and the lack of a centralized marketplace, however, most brokers charge a commission for penny stocks and require a minimum share purchase amount. Make sure you know how much your broker charges for penny stock transactions before you begin trading penny stocks. You can start your search for a good broker to trade penny stocks through by looking through the table below. 

Are Penny Stocks for You?

Whether penny stocks are for you or not depends largely on your risk tolerance. While the market volatility of penny stocks can be considerably higher than that of regular listed stocks, your downside risk is limited to the purchase price. This amplified risk is due to the nature of penny stocks since they are often either stocks of companies facing financial difficulties or stocks of small, new companies without a performance track record or proven profitability. 

Even with the risks involved, you can gain great rewards from trading penny stocks. For example, Amazon.com’s stock was once a penny stock that traded at $1.50 per share in June 1997, and you could still buy the stock under $6 per share in September 2001. Having the foresight to purchase Amazon at those low levels would have provided quite a handsome return since its current value is $3,443 per share!

You may find it challenging to find another gem that performs like Amazon among the thousands of penny stocks you can trade. Still, if you do diligent research and manage to identify an industry with strong future prospects, you could pick the next Amazon to invest in.