Definition
Penny stocks are shares of small companies trading at low prices, typically under $5 per share and often below $1. They usually trade on over-the-counter (OTC) markets rather than major exchanges. Penny stocks are highly speculative with characteristics including low liquidity, wide bid-ask spreads, limited public information, high volatility, and susceptibility to manipulation ('pump and dump' schemes). While occasionally producing large gains, most penny stocks result in losses. The SEC warns investors about penny stock risks.
Example
A $0.50 penny stock might double to $1.00, but the spread could be $0.45 bid / $0.55 ask, meaning you lose 20% immediately on entry. Limited liquidity means you might not exit at desired prices.
FAQ
What is Penny Stocks?
Low-priced stocks of small companies, typically trading below $5 per share.
Why is Penny Stocks important?
Penny Stocks helps investors evaluate industry terms and make more informed decisions.