Both penny stocks and a small cap stocks may represent the shares of a company with low market capitalizations. That is, companies with relatively small valuations. However, there is an important distinction between these two categories: A penny stock trades at both a low price and low market capitalization, and often trades over-the-counter (OTC) instead of being listed on a stock exchange.
Meanwhile, a small cap stock is based solely on a company's market capitalizations and not its stock price or where it is listed. Indeed, many small cap stocks do trade on stock exchanges and are included in small cap indices.
Key Takeaways
- Both penny stocks and small caps refer to company shares with relatively low market values.
- Penny stocks are classified based upon their share price being lower than $5 per share and are often traded over-the-counter.
- Small cap stocks are classified by their market value being under $2 billion, and are often listed on stock exchanges. Their share prices may also be above $5.
Penny Stocks
A penny stock refers to a small company's shares that typically trade for lower than $5 per share. Penny stocks are usually considered high-risk investments due to their low price, lack of liquidity, small market capitalization and wide bid-ask spread. Although some penny stocks trade on large exchanges such as the New York Stock Exchange (NYSE), most penny stocks trade via over-the-counter transaction via mechanisms like the OTC bulletin board (OTCBB), also known as the "pink sheets."
For example, assume company ABC is trading at $1 per share and is not listed on any national exchanges. Instead, it trades on the over-the-counter bulletin board. Therefore, company ABC's stock is considered a penny stock.
Small Caps Stocks
Now let's consider the case of small cap stocks. A small cap stock refers to a company's stock with a small market capitalization between $250 million and $2 billion. The market capitalization of a company is the market value, in dollars, of a publicly-traded company and is calculated by multiplying its shares outstanding by its stock price.
Unlike a penny stock, a small-cap stock can have a price greater than $5 and trade on a traditional stock exchange. For example, assume that a hypothetical company DEF is trading at $100 per share, has eight million shares outstanding, and trades on the New York Stock Exchange (NYSE). Therefore, company DEF is considered a small-cap stock because its market capitalization is $800 million ($100*8 million), which is in between the thresholds of value for being classified as a small-cap stock.
Note that the market capitalizations of a penny stock may often be less than $250 million. In general, companies with market caps less than $250 million are known as microcaps.
FAQs
Penny stocks are classified based upon their share price being lower than $5 per share and are often traded over-the-counter. Small cap stocks are classified by their market value being under $2 billion, and are often listed on stock exchanges. 1 Their share prices may also be above $5.
What is the difference between penny stocks and small caps? ›
One of the main difference between small cap and penny stocks is that small cap stocks are categorized by their market capitalization and growth prospects, while penny stocks are defined by their low price point and associated with higher risk irrespective of market cap.
What is a small-cap stock? ›
Small-cap stocks are shares of companies with total market capitalization in the range of about $300 million to $2 billion. Small-cap companies have the potential for high rates of growth, making them appealing investments, though their stocks may experience more volatility and pose higher risks to investors.
What is the difference between penny stocks and regular stocks? ›
In general, penny stocks have lower trading volumes or liquidity, and this lack of liquidity means it may be more difficult to sell a stock when you want to. They also suffer from large price fluctuations, so any bit of news will cause a penny stock's price to rise or fall.
Is it a good idea to invest in small-cap? ›
High Growth Potential
Small cap funds primarily invest in companies with smaller market capitalisations, which often have significant growth potential. These companies are at an early stage of development and can experience rapid expansion, leading to higher returns for investors.
What is the most successful penny stock ever? ›
Top 10 Most Successful Penny Stocks in History
- AAPL-2.01% AAPL - NYSEApple Inc. ...
- F+1.19% F - NYSEFord Motor Company. ...
- HEAR-1.38% HEAR - NYSETurtle Beach Corporation. ...
- MNST+0.99% MNST - NYSEMonster Beverage Corporation. ...
- PLUG-3.41% PLUG - NASDAQPlug Power Inc. ...
- AMD+5.15% AMD - NYSEAdvanced Micro Devices Inc. ...
- MED+4.84% ...
- NVAX+1.99%
Best small cap stocks for long term
| S.No. | Name | CMP Rs. |
|---|
| 1. | Madhuveer Com | 98.00 |
| 2. | Carysil | 844.05 |
| 3. | Manaksia Coated | 63.22 |
| 4. | Gallantt Ispat L | 361.35 |
23 more rowsSmall-cap stocks offer high growth potential, but it's wise to consider the pros and cons before making decisions. Higher growth potential than mid- to large-cap companies. Lower share prices can make your initial investment easier. Less competition from institutional investors.
Do small caps do well in a recession? ›
Over the past 11 recessions, small caps have beaten their larger cousins by over 16% during the 12 months after a recession started. Consider the periods before and after the dot-com crash.
Is small-cap Value a good investment? ›
Not only have small-cap stocks historically outperformed their larger peers, but they've done so strongly, by an annual average of more than 300 basis points (bps), and consistently, more than 69% of the time (Figure 1).
Potential risks of penny stocks
Lack of liquidity: Penny stocks are often illiquid, meaning it can be difficult to buy or sell your shares quickly without impacting the price. Unprofitable: Many penny stocks represent a stake in a company that has not and will not generate earnings for its shareholders.
Which is the best penny stock to buy? ›
List of Penny Stocks
| Company Name | LTP | % Change |
|---|
| SVP Global Textiles Ltd | 6.89 | 9.89 |
| Rolta India Ltd | 4.83 | 5 |
| Future Enterprises-DVR | 6.1 | 4.99 |
| Sanco Industries Ltd | 8.95 | 4.92 |
6 more rowsPenny stocks are generally stocks that trade at less than five dollars a share. This relatively low price per share can make them attractive to many investors with limited resources. Penny stock promoters often reach out to victims by cold calling them. Use this information to recognize and protect yourself.
Why own small-cap stocks? ›
Key Benefits of Small-Cap Investing:
Diversification - lower correlation to large-caps improves overall portfolio efficiency. Growth potential - younger, faster growing companies earlier in life cycle. Sector/Industry breadth - wider array of sectors and industries compared to large-caps.
Why are small-cap stocks falling? ›
The fall in midcap and smallcap stocks was catalyzed by stretched valuations and worries on liquidity risk in SMID funds. However, the analyst believes that the fundamentals remain strong with broad-based earnings growth continuing in FY25, albeit with some deceleration.
What is the best way to invest in small-cap stocks? ›
Invest in index funds
You can buy a pooled financial product, such as an exchange-traded fund (ETF) or mutual fund, that tracks an index that covers a universe of small-cap stocks. The best-known ones are the Russell 2000 Index, the Standard & Poor's SmallCap 600 Index and the MSCI USA Small Cap Index.
At what price is a stock considered a penny stock? ›
Penny Stocks
A penny stock refers to a small company's shares that typically trade for lower than $5 per share. Penny stocks are usually considered high-risk investments due to their low price, lack of liquidity, small market capitalization and wide bid-ask spread.
Do small caps really outperform? ›
If you have a greater risk tolerance and longer time horizons, small-cap stocks tend to outperform big-caps over time because they are able to grow more rapidly than larger companies. If you prefer stable appreciation and dividend income, big-caps may be more suitable.
Should I invest in small or large cap stocks? ›
Small-cap stocks and large-cap stocks both come with their own pros and cons. While small-cap stocks can generate higher returns, they also have a higher risk profile. Conversely, large-cap stocks witness smaller growth but are more stable. Investors should consider investing in both for a balanced portfolio.
Are penny stocks better? ›
Penny stocks represent a volatile and risky part of the stock market, and many investors have suffered big losses trying to invest in them. With so many well-established companies available to own, there's little reason to settle for the highly risky companies that issue penny stocks.
