Micro penny stocks are stocks that trade for small prices and have relatively small market capitalization compared to other similar stocks. These stocks are usually not traded on the stock exchange, instead being traded on over-the-counter markets like the Over the Counter Bulletin Board (OTCBB) or the Pink Sheets. The lure of micro penny stocks for investors is the possibility that the small companies underlying such stocks will make it big and carry the investors to a significant profit. In reality, such stocks rarely break through, and investors relying on them are taking a big gamble.
It is the dream of many investors to get in on the ground floor of a small company that breaks out and becomes one of the titans of industry. Many investors don't have the kind of capital to invest in blue-chip companies that dominate the market, and they rely instead on speculative investments in companies that are either just starting out or are struggling to keep up with the bigger players. Micro penny stocks are often the target of these investors, as they can be bought cheaply and may have the potential to be huge money makers.
What constitutes a micro penny stock may vary depending on the source. Some firms consider a stock a micro penny stock if it is currently trading at a price of less than $5 US Dollars (USD) per share. Other sources focus on the stock's market capitalization, which is calculated by multiplying the price of the stock by the number of outstanding shares on the market. If that total is between $50 million USD and $300 million USD, some stock experts would call it a micro cap stock.
Even these definitions can be misleading, however, as some large companies with proven track records and a large market capitalization trade for less than $5 USD per share. In addition, some stocks have small market capitalization and yet trade for higher prices on the market. Micro penny stocks, therefore, may be best categorized on a case-by-case basis.
Generally, micro penny stocks are traded on over-the-counter markets, which means that the trades are not recorded by a centralized body. With over-the-counter stocks, the liquidity is often low, meaning that the stocks are not traded often. That also leads to large spreads between the buying and selling prices of the stocks. Investors who take a chance on a micro penny stock will often overlook these drawbacks and the fact that little may be known about the underlying company, all in hopes of finding one that is headed for bigger things.