We define Penny Stocks and Shares as those stocks that are low price because a firm is in its early stage of development. The upper limit value is subjective, however, the philosophy behind Penny Shares is that they should be very low cost and this site will use 20p as [a general] upper limit.
This site does not recommend shares not listed on a major exchange. There are serious risks involved with non-legitimate Penny Stocks, which you can learn about here.
The term "Stock" is most often used in North America whilst the term "Share" is most often used in the UK.
The London Stock Exchange's Alternative Investment Market is the best source of information on Penny Stocks and Shares in the UK. That these shares are listed on the LSE reduces some level of risk. Risk is further reduced in that they can be bought and sold through a variety of legitimate online and offline brokers.
A good and readily available source of information to compare and contrast Penny Shares is the Financial Times back pages.
The US has it's own version of the AIM: NASDAQ Small Cap etc.
The philosphy behind Penny Stocks and Shares is essentially this:
A stock trading at 10p today could trade at 20p tomorrow or in a years time. The profit potential of 100% (excluding trading/broker costs) is feasible.
A blue chip stock trading at 1000p today may or may not trade at 2000p at some point in the future. However, the feasiblity of it doing so in the relatively short term is markedly reduced.
A good example of a successful Penny Share (for me) has been Griffin Mining. Traded on the London Stock Exchange, it's value has risen from a few pence and, at the time of writing, is 85p and heading for the £1 mark.
Determining the quality of Penny Stocks and Shares is the game and valuation criteria is similar to that of Stocks and Shares in general. Here are a few criteria:
Market Capitalisation: if a low cost share has a high market capitalisation then it will likely be more liquid. You will see more movement (up or down). Trading Volume is a similar concept.
Market/Macro Trend: if the market is moving in a direction, then a stock may tend to move in that direction irrespective of the company fundamentals. Get in during a Bull market and out during a Bear market.
Fundamentals/Micro Trend: if the company is doing all the right things - good management, good strategy etc - then risk is reduced. But good companies still fall during a Bear market, meaning that quality companies do not always perform.
Industry Trend: the general market may be moving in one direction but a particular industry in another. There are various reasons. For example, tech stocks declined post 2000 but property rose.
The Numbers: figures such as PE ratios etc may not reveal the whole truth. During the tech boom, all the conventional models were put to one side.