The long term plan of most businesses is to grow into publicly traded companies. That means splitting ownership into shares that can be bought and sold on a stock exchange. This increases access to capital raising opportunities and in the long term, it fuels further growth.
When a company goes public, however, its stocks can fall into a category known as penny stocks, indeed that in part means they cease being listed on the exchange. The discussion about what that status means to the company is not a common one.
The discussion that is common, online and elsewhere, is about the opportunities that penny stock trading has made available to investors.
What is a penny stock?
The creation of the penny stock category was among the first major actions by the US Securities Exchange Commission (SEC) after its inception in the early 1930s. Any stock whose price is below a dollar automatically becomes a penny stock.
That also means it cannot be listed on a national stock exchange. All the buying and selling of penny stocks happens over the counter (OTC), and that is why they are also known as over-the-counter stocks.
It is not a permanent place for a stock to be, though. When its price grows significantly, at least beyond the one dollar mark, it can be relisted on a national stock exchange, and of course, it ceases being referred to as a penny stock.
It is important to point out that stocks trading below $5 are sometimes considered to be in the category of penny stocks.
Businesses that become penny stock companies
In the US, close to 5000 companies have shares that trade below $1. Meanwhile, those with a share price of below $5 are close to 7000 companies.
While it is true that no business can be described as inherently penny stock, some are inclined to be in that category. The first comprises technology companies with innovations that are yet to be fully developed or a product released to the market. Their potential is also often not well known to the outside world.
Those who buy these stocks often do so with the anticipation that once the company’s products hit the market or the actual potential becomes public, they stand to see their value grow significantly.
The second category of penny stocks includes companies that have seen better days, and are going through difficult times. For example, they could be facing bankruptcy or a disruptive technology that is making their products obsolete.
Indeed, this is not where anyone would want their business to be. The future is almost always unpromising and most investors avoid putting their money in it. With that stated, many companies have become penny stock and then went on to regain their potential and see their share price grow beyond a dollar.
Are there any benefits of being a penny stock?
It is hard to find a benefit of being a penny stock. Every business aspires to have a big market capitalization as that is how to measure its success. It is however important to point out that being a penny stock doesn’t necessarily translate to failure.
To a large extent, the price of the stock is irrelevant to the day-to-day operations of the company. And there is hardly any difference whether the company is a mega, large, or a penny stock (nano).
However, we could say that the lack of significant media interest in the company can give it the room it needs to strategize and grow.
What about the disadvantages?
The one major disadvantage of being a penny stock is that you can easily become the target of pump and dump schemes. That means that a few sophisticated investors buy the stocks in large quantities and then start a campaign of spreading rumors and news that the company’s fortunes are about to change (pump). It could be a made-up story about the anticipated release of a product, an acquisition, onboarding of a new client, or a new invention.
This campaign is meant to attract new but less sophisticated investors. The ensuing demand drives the price to go up and at some point, those who started the campaign exit with huge profits. Their exit (dump) drives the price down and that means considerable losses to the other investors.
When this happens it might create bad publicity for the company, especially when investors can’t separate the management from those who run the pump and dump schemes.
Also, penny stock companies attract less media coverage, which denies it attention from major investors.
It is important for the company to be in control of the narratives told about it. That means in part having a competent PR team in place.
Do you need to do anything?
There is nothing a penny stock can do directly to make its stock prices grow beyond a dollar. The price is determined by the market forces of supply and demand.
The best management can do is to improve the company’s products, systems, and processes. And also be innovative to create opportunities for growth and expansion. When these steps become apparent to the public, more people become interested in buying your shares, increasing the demand and consequently the price.
It also helps to manage well the public image of the company through a competent PR team.
As a company, being a penny stock means that either you are yet to be discovered or reach your potential. It could also mean that you’ve been through tough times. In both cases, the call to action is to work on your product, processes, and systems as well as be innovative to create opportunities for growth.