Many stocks that trade on exchanges around the world are priced much higher than a dollar. Their prices fluctuate about a mean that is usually in the double digits. Still, there are other types of stocks that are originally valued around a dollar. They are often stocks of smaller companies that launch with low levels of capital. Some are commonly referred to as micro-caps or nano-caps based on the total company valuation.
According to the Securities Exchange Commission, a micro-cap stock is a company with a market value less than $300 million. The smallest companies, called nano-caps, have a market value of less than $50 million. Stock prices of such companies frequently hover around a dollar. Although the market value may seem high, when these companies initially raise money they also issue huge amounts of shares -- most issue more than 100 million shares -- to average out the unit price of their stock and make it more affordable to individual investors. This means that a nano-cap company worth $50 million could issue 100 million shares and average out its price to about 50 cents per share ($50 million / 100 million shares).
Many low-value stocks are referred to as penny stocks. However, the name is not literal. The U.S. Securities and Exchange Commission, for example, defines a penny stock as any small company stock valued at less than $5 per share. Although the SEC sets the benchmark price at $5, the stock prices of many of these small companies are expected to fluctuate about a mean price that may be less than a dollar because of their smaller market capitalization.
Where They Trade
Most stocks valued at less than a dollar do not trade on centralized exchanges such as the New York Stock Exchange or the Nasdaq in the U.S. Instead, they're traded over-the-counter on the OTC Bulletin Board or as Pink Sheets. This often means you have to call your broker directly to trade these low-priced stocks over the phone. Small companies that launch as penny stocks are not the only ones that trade over the counter. Also mid-size companies that have lost significant value and are delisted from central exchanges find a home in the OTC Bulletin Board or Pink OTC markets.
Many people who invest in dollar valued stocks take advantage of their low price and possible opportunities for growth. Although many new companies launch with a small market capitalization, they can go on to be highly valued companies even on centralized exchanges. However, the risks of investing in low-priced stocks relate to their liquidity. This means it can be difficult to sell your stock once you buy it. This is because of the low volumes associated with these types of stocks. Additionally, the price of these stocks can be volatile as opposed to other stocks that trade on a centralized exchange.
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