Many people wonder what the difference is between a penny stock and microcap. The simple answer is they are both stocks that usually sell for under a five dollars and most of them sell for pennies. Microcaps and penny stocks are like many things in the financial world . . .there are many shades of “green”.
There really is no official term for microcaps and penny stocks, in fact which are and which are not will depend on exactly whom you ask. Each trader will have a different set of criteria for deciding whether or not a stock is “penny stock” or “microcap stock” or not.
But no matter what you call them they are usually defined by three things.
(1) the price per share,
(2) the market that the stock trades upon and
(3) the market capitalization of the company from which the stock derives.
Of course, you will find some variations on each of these factors. In some cases
some brokerage firms will treat all stock from companies under a certain market cap as a penny stock or microcap. But basically the Securities Exchange Commission (SEC) will consider all stocks with a price per share of less than five dollars a penny stock.
No matter what you call them both microcap/penny stocks are high risk. The attraction to them is that they can yield high rewards for the small amount of money you will use to trade them. But you must carefully research these stocks.
You must make sure that you understand that it is easy to lose all of the money you have invested. Microcap/penny stocks can be volatile and wildly unpredictable. But, with some smart planning it is equally easy to make fast money with these stocks.
It is recommended that you get a very good, reputable stock picking service that will do the necessary background research for these yet to be proven, small company-based stocks. This way you can limit your chances of losing money and you can greatly increase your chances of doing very well with them. These services do all the research for you and the good ones will give you realistic entry and exit points.
Microcap/penny stocks can be profitable in the right hands. Because they are usually from smaller and largely unproven companies, they can be purchased at bargain prices. If the company does suddenly have a growth surge, not only have you gotten in under the huge price increase, you have just made a large profit.
One service that is highly recommended is Micro Cap Millionaires. The owner researches his stock picks very thoroughly and as a very good track record.