A penny stock company is usually a small company. Even in non-financial terms, the word small is a very relative term. Since different people have varying definitions of the term a more standardized way of looking at such companies is important especially when you are looking into invest in or trade stocks of such a firm.

The shares of stocks in smaller firms can be found in specialized trading venues aside from the national stock exchanges like those found in New York, London and Tokyo.  Another point to note is that the prices per share of small company stocks are more affordable than, say, the blue-chip stocks, which is important for discount traders.

Two Definitions

With that being said, what exactly is a small company?  There are two ways of looking at the matter with each definition often contradictory in nature with the other as environmental factors come into play.  For example, a penny stock company may be considered small because its capitalization falls under one definition but its price per share on the stock market may not qualify it to be a small company in the other definition.

The first definition comes from the likes of Investor Words and Investopedia that categorizes companies from nano cap to mega cap based on the capitalization in millions of dollars of the companies involved.   Thus, a small company has capitalization of $300 million to $2 billion under Investopedia with Investor Words setting the range at $250 million to $1 billion.  The micro-cap and nano-cap companies have lower capitalization under $50 million until $3000 million.

The second definition is on the practical side. Companies with stocks selling for under $10 per share in the national stock markets and other specialized trading venues are considered as issued by small companies.  Within the stock market, stocks selling for $5 and under are considered as penny stocks, thus, also falling under the small company definition.

Two Trading Venues

Small companies are usually traded in two main trading venues.  First, The OTC Bulletin Board enforces reporting requirements akin to the regulations imposed by the Securities and Exchange Commission on the large corporations listed on the so-called big boards.  In addition, the strict reporting requirements of Sarbanes-Oxley must also be followed.

These reporting requirements include quarterly and yearly financial statements, stock performance reports and other relevant data needed by investors to make good decisions.  Investors can also access said information on financial servers like Yahoo!, Hoovers and Market Guide, which also hosts data for the companies listed on the national stock exchanges.

Second, the Pink Quotes, known by its more popular name of Pink Sheets, is not technically a stock market exchange.  Instead, it is an electronic quotation system that displays the quotes from stockbrokers for many over-the-counter securities include penny stocks, shares with narrow geographical interests and other inactively traded shares.

Unlike in the OTCBB, the listed companies in the Pink Sheets are not required to comply with the reporting requirements of the SEC and the Sarbanes-Oxley.  The good news is that the new classification system allows investors more access to reliable information about the companies especially where the international stocks are concerned.

Smaller companies have the advantage of being nimble and adapting to the needs of the marketplace. But, the downside is that they dont have large cash reserves to rely on when the going gets tough. It is easier to grow when you are a smaller company and the opportunities for rapid growth are reduced for large-cap companies. There are pros and cons to whichever side of investing you choose.

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