Investing in small companies can be rewarding, because their stocks tend to have greater upside growth potential than stocks of larger companies. So, if you are looking for the best stock and share investments and considering small companies, get to know penny stock and small-cap stock first.

Both penny stock and small-cap stock refer to shares of companies having low market capitalizations. However, these two stocks differ in many ways.

Defining Penny Stock and Small-Cap Stock

Penny stock: a small company’s stock that typically trades for less than £1 per share

Small-cap stock: a stock issued by a company with a market value between £100 million and £500 million

Similarities

Both penny stock and small-cap stock:

• Have low market caps
• Attract investors looking for companies that growing fast

Differences

A penny stock is classified based upon its share price being below £1 per share, while a small-cap stock is classified based upon its market cap being between £100 million and £500 million. A small-cap stock can trade at a price greater than £1 per share.

Although penny stocks can be found on major exchanges like the London Stock Exchange (LSE), the majority of them are traded over-the-counter (OTC); while small-cap stocks typically trade on traditional stock exchanges.

Penny stocks are usually considered high-risk investments with low liquidity and significant volatility, while small-cap stocks generally have more liquid and lower risks than penny stocks.

A Quick Summary

Assume company ABC is trading at £0.5 per share on the over-the-counter bulletin board instead of national exchanges. Therefore, we classify company ABC’s stock as a penny stock.

Assume company XYZ is trading at £50 per share, has ten million shares outstanding, and trades on the LSE. Therefore, company XYZ is considered a small-cap stock because its market capitalization is £500 million (£50*10 million).