What is Penny Stock?

What is a 'Penny Stock'

A penny stock typically trades outside of the major market exchanges 

at a relatively low price and has a small market capitalization. These 

stocks are generally considered highly speculative and high risk because

 of their lack of liquidity, large bid-ask spreads, small capitalization and 

limited following and disclosure. They often trade over-the-counter through 

the OTC Bulletin Board (OTCBB) and pink sheets.

Penny stocks, also known as cent stocks in some countries, are 

common shares of small public companies that trade at low prices per share.

In the United States, the U.S. Securities and Exchange Commission (SEC) 

defines a penny stock as a security that trades below $5-per-share, is not listed 

on a national exchange, and fails to meet other specific criteria In the United Kingdom, 

stocks priced under £1 are called penny shares.

Prosecutors and the Federal Bureau of Investigation say that fraud is widespread 

in the penny stock market. Even though the penny stock companies are small, the 

scams that involve them can be for tens of millions of dollars.

In the case of many penny stocks, low market price inevitably leads to low market 

capitalization. Such stocks can be highly volatile and subject to manipulation by stock promotersand pump and dump schemes. Such stocks present a high risk for investors, 

who are often lured by the hope of large and quick profits. Penny stocks in the US are 

often traded over-the-counter on the OTC Bulletin Board, or Pink Sheets.

Another problem with the penny stock market is that holders of shares in penny 

stock companies often encounter liquidity problems, which makes it difficult for 

holders of the stock to cash out of positions.

In the United States, the SEC and the Financial Industry Regulatory Authority (FINRA)

have specific rules to define and regulate the sale of penny stocks.