Penny Stocks. What goes through your mind when the words are spoken? A stock trading for just a few pennies on the dollar? A stock trading on a unknown or even foreign stock exchange? Well, why all of that may be true, the official definition by the Securites and Exchange Commission (SEC) refers to a low priced stock (below $5 per share) of a very small company. They mention that some trade on the Pink Sheet markets and the Over The Counter Bulletin Board (OTC), but they also include those stocks under $5 trading on well known securities exchanges such as the NYSE, Nasdaq, & Amex. Some other definitions also include the total value of the company, commonly know as market cap (generally under 500 million). Who's right? To truly answer the question, its probably some of both. Suffice to say a penny stock could trade on OTC, Pinksheets or even major exchanges so long as they are under $5 per share and have a market cap of under $500 Million.

Now that we've figured out what a penny stock is, where to they come from? Do all stocks start out as penny stocks? The short answer is no. Penny stocks become penny stocks, usually after falling on hard times. Most of these stocks would suprisingly have started out trading after an initial public offering (IPO) at a more "normal" price. The ranges that stocks get listed during an IPO can vary greatly, depending on how may shares are being offered and the demand for them at the time of the offering. Shares can start trading at several different ranges, $7 to $9, $15 to $20, $30 to $35, or even higher. The common misconception is that stocks like General Electric (GE) and Walmart (WMT) were once penny stocks. This is simply not true, and even though if you pull up a historical chart (all data) on these companies, it may appear that a company like Walmart (WMT) has traded for pennies at one time, the chart is simply accounting for stock splits, in which Walmart has had several. The fact is that a stock like Walmart has never actually traded on the open market for less that around $15/share.

Establishing the fact that penny stocks are most often stocks that have fallen on hard times, Croc's Inc. (CROX) is a stock that embodies our definition of a penny stock. Croc's went public back on 2/8/06 at an initial public offering (IPO) price of $30.00/share. Within a short amount of time, it zoomed to over $70/share. But then came the start of longest recession post World War II, and Croc's started slashing their financial target's, inventories started to build. This was at a time when consumer spending was starting to plunge. The drop Croc's experienced was swift and deep, actually trading clear down to the $1/share range. A Nasdaq listed stock, trading at $1/share with a market cap significantly under $500 Million, now becomes (if only for a short while) a penny stock.

Note: Crocs Inc. was a previous Penny Stock University pick on 10/9/2008 with an average entry by subscribers of $1.57/share. CROX went on to trade as high as $14.08 per share for a potential gain of over 900% for PSU members.