PENNY STOCKS

What is a Penny Stock?

A penny stock is a common share of a small public company that typically trades for less than $5 per share. The term “penny stock” generally refers to stocks that are traded over-the-counter (OTC) rather than on major exchanges like the New York Stock Exchange (NYSE) or NASDAQ. These stocks are often characterized by their low market capitalization, which usually falls below $250 million, making them highly speculative investments.

Characteristics of Penny Stocks

1. Low Price: Penny stocks are defined primarily by their low trading price, which is usually under $5 per share. Some definitions even consider stocks priced under $1 as penny stocks.
2. Market Capitalization: Most penny stocks belong to companies with small market capitalizations, typically less than $250 million. This classification can also include microcap stocks, which may have even lower valuations.
3. Trading Venue: Unlike larger companies whose shares are listed on major exchanges, penny stocks are often traded on OTC markets such as the OTC Bulletin Board or through pink sheets. This means they may not be subject to the same regulatory scrutiny and reporting requirements as larger companies.
4. Volatility and Risk: Due to their low price and market capitalization, penny stocks tend to be highly volatile. Small changes in price can represent significant percentage gains or losses, making them risky investments.
5. Lack of Information: Companies issuing penny stocks often do not provide sufficient financial information or transparency, making it difficult for investors to make informed decisions.
6. Fraud Potential: The penny stock market is known for its susceptibility to fraud schemes such as “pump and dump,” where promoters artificially inflate stock prices before selling off their shares at a profit, leaving other investors with worthless securities.

Conclusion

Investing in penny stocks can offer opportunities for high returns but comes with significant risks due to volatility, lack of information, and potential fraud. Investors should conduct thorough research and understand the inherent risks before engaging in penny stock trading.

The U.S. Securities and Exchange Commission (SEC) defines these securities specifically to help protect investors from the unique risks associated with them123.