Glossary
Penny stock
A low-priced, usually small and thinly traded share; the SEC generally treats stocks under $5 as penny stocks, with exceptions.
On this page
A penny stock is a share of a small company that trades at a low price, usually with little volume and limited public information. Despite the name, few trade for pennies. The SEC's working definition generally covers stocks priced below $5 a share, with exceptions for many shares listed on national exchanges that meet certain standards. Penny stocks matter to investors mainly because of their risks: wide spreads, sharp swings and a long history of fraud.
How they trade
Many penny stocks are quoted Over the counter (OTC) rather than on an exchange, often because the company is too small to meet listing standards. Others are exchange-listed companies whose price has fallen. Because SEC rules impose extra requirements on brokers that recommend penny stocks to customers, some brokers restrict trading in them or charge more.
Risks to understand
- Liquidity. Daily volume can be a few thousand shares, so selling a position may push the price down sharply. See Liquidity.
- Disclosure. Some OTC companies file little or no current financial information with the SEC.
- Manipulation. In a pump-and-dump, promoters buy cheaply, hype the stock through emails or social media, and sell into the buying they created. The SEC and FINRA repeatedly warn investors about this pattern.
- Dilution. Cash-hungry small companies often issue new shares, shrinking existing holders' stakes. See Dilution.
Exchange-listed stocks that fall below $1 for an extended period risk delisting under minimum-bid-price rules, which is why many penny-priced companies carry out a Reverse stock split.