If a penny stock were to be defined, the best way to explain it would be — it is a form of market-traded security or a common share trading on the stock markets at a very low price.
The interpretation of a penny stock varies from country to country. In Canada, a penny stock is one that is available for less than C$ 5 and belongs to a publicly listed company that has a market capitalization between C$ 60 million and C$ 300 million.
With market cap being a factor, not every stock that is trading under the value of C$ 5 is a penny stock. For instance:
Desert Mountain Energy Corp (TSXV:DME), which is engaged in the development and exploration of rare earth and helium gas properties, was trading at C$ 4.2 apiece on June 2, 2021. As per the TMX website, Desert Mountain Energy’s market cap is approximately C$ 294 million. Hence, it fits the description of a penny stock as it satisfies both the trading price and the market capitalization conditions.
On the other hand, Baytex Energy Corp (TSX: BTE), which is involved in producing, developing, and acquiring natural gas and crude oil, was trading at C$ 2.17 per share as on June 2, 2021. As per the TMX website, Baytex Energy has a market cap of C$ 1.2 billion. Therefore, this does not fall under the category of a penny stock despite its trading price is less than C$ 5 as its market cap exceeds the C$ 300-million mark.
Why do investors show interest in penny stocks despite their risk factors?
Penny stocks are often counted as risky investment options because of their high volatility. Despite that, however, some traders explore them because of a few factors, such as:
- Penny stocks are sold at low prices: these shares are available for C$ 5 apiece at best, which is why investors looking to spend very little money often seek good options in this category.
- More shares to buy: If an investor has done sufficient research and is confident of the penny stock’s fundamentals and performance, they have the option to purchase more shares at a low price. Similarly, if left with excess money in hand, the investor can also choose to diversify their portfolio by investing in other penny stocks post all the due diligence. This way, the investor can mitigate the risk and increases their chances of making a good profit.
- Minimizes the risk of losing a lot of money: As penny stocks trade at discounted prices, investors are not required to spend a lot of money when it comes to penny stocks. Investors are generally advised to put in only a part of their excess funds that they can afford to lose in case a bad day hits the stock markets.
Penny stocks also often gain investor attention because of their chances of bringing healthy returns in the long run for a low investment. However, investors are advised to keep in mind that trading in penny stocks requires risk tolerance and a firm hand in doing research diligently to learn about the stock’s performances.
The above constitutes a preliminary view and any interest in stocks should be evaluated further from investment point of view.