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A penny stock index is a tool for tracking the growth of the smallest stocks on an exchange. The popularity of penny stocks is based on their low cost and potential for explosive growth. Financial pros generally consider penny stocks to be exchange-traded stocks with a share value of under $1.00. The value threshold for penny stocks is debatable, however, and subject to interpretation.
With all of the variety of handy index tracking funds of the market, some investors might be wondering if there is such a thing as a penny stock index fund. The answer from financial professionals is that there are such funds, although they are more likely to be called “micro cap index funds.” Looking at the difference between micro cap stocks and penny stocks illustrates some very interesting financial principles in the investing community.
A micro cap stock is similar to a penny stock, but with an important defining difference. Traders generally measure a micro cap stock by its total market capitalization. The market capitalization for a stock is the price of its shares multiplied by the number of outstanding shares on the market. Many traders consider a stock to be a micro cap stock if it has a market capitalization below a certain threshold.
A penny stock index fund, or micro cap stock index fund, basically invests in stocks that are “the bottom of the market” in terms of cost. These handy funds bundle together a collection of small and low-priced stocks, offering investors the opportunity to trade them, track them, and buy and sell them throughout a market day. These funds are called exchange traded funds or ETFs.
In recent reports, financial experts have shown why investing in a “penny stock index fund” may not bring the same returns that are shown on an actual penny stock index. One reason is that the index fund can have trouble buying all of the most lucrative penny stocks or micro cap stocks. In general, a small stock index fund produces limited gains and losses, where investing in the right single penny stock can be a huge winner – or a big loser.
For an accurate view of how bundles of penny stocks tend to perform, investors can keep an eye on the broadest penny stock index tools available through an exchange. An online brokerage account or other investment service should be able to provide the investor with a list of penny stock indices, as well as potential small stock funds and ETFs. Armed with these tools, investors can make the tough decisions about whether, and how, to invest in penny stocks, micro cap stocks, or other offerings from smaller companies.