Expert: Paul Henneman - 3/22/2010

Question
I don't know how people determine that my questions are always homework questions? Why would a simple question about stocks be a homework question? Anyways, I hope you can help me answer this, I just want to know how much stocks I'll get for buying a penny stock, read on...thanks.

I see that some penny stocks are less than a penny (0.0008), does this mean that they give you more stocks than one, when you pay one cent for a stock? How could a stock even be listed this low, how can a company get capitalized with pennies coming in? What makes a companies stock price be this low, low demand? Do all companies enter the market as penny stocks?

Answer
Mike,
  Thank you for your question!
Yes, if a stock is listed at less than a penny, you do get more than one share per penny of investment.  Penny stocks are almost always tiny companies, not traded on major stock exchanges. Instead, they are traded on the bulletin boards, or 'over the counter', which are basically less formal ways to trade these very small public companies.   The market cap of a company is a function of the number of shares outstanding, and the price per share. So, for example, if a company that had revenues of just a few million dollars was publicly traded, but had 20 million outstanding shares, then each share would be worth very little. In some cases it is simply a function of how small the company is, in other cases the company may be having a great deal of trouble, and a once higher stock price has fallen.  Usually when you get down to the tiny per share amount you use in your example, the company may essentially have ceased to operate, and is being kept open simply because there is some small value in that it is publicly traded. At times other private companies or investors can do a special type of merger with such a publicly traded company, to get access to investors.
Not all companies enter the market as a penny stock. In fact, just about all public companies that trade on the major exchanges do not enter the market as a penny stock. Most major exchanges have requirements that the company's listed on that exchange sustain a minimum stock price, or they can be delisted. Only companies that go public on the bulletin boards, or pink sheets, can really be penny stocks.  
The website Wikipedia has a brief but good definition and other information on penny stocks, I recommend you take a look:
http://en.wikipedia.org/wiki/Penny_stock

I hope this helps! Please do not hesitate to follow up if I can be of any additional service.

Best Regards,
Paul

Paul Henneman
President
ValuEngine Inc
www.ValuEngine.com