Penny Stock
Low-priced shares of small companies, typically trading below $5 per share.
Definition
Penny stocks are shares of small companies that typically trade for less than $5 per share, often on over-the-counter (OTC) markets rather than major exchanges. They are characterized by low market capitalization, limited liquidity, wide bid-ask spreads, and minimal regulatory oversight. While penny stocks can occasionally deliver massive returns, they carry extreme risk — many penny stock companies have unproven business models, limited financial history, and are susceptible to pump-and-dump schemes where promoters artificially inflate prices before selling. The SEC warns that penny stocks are among the riskiest investments. Most financial advisors recommend avoiding penny stocks, especially for inexperienced investors.
Related Terms
Stock
A share of ownership in a company that represents a claim on part of its assets and earnings.
InvestingMarket Capitalization
The total market value of a company's outstanding shares of stock.
MarketsLiquidity
The ease with which an asset can be converted to cash without significantly affecting its price.
TradingRisk Management
The process of identifying, assessing, and controlling threats to an investment portfolio.