Penny Stock

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DEFINITION of 'Penny Stock'

A stock that trades at a relatively low price and market capitalization, usually outside of the major market exchanges. These types of stocks are generally considered to be highly speculative and high risk because of their lack of liquidity, large bid-ask spreads, small capitalization and limited following and disclosure. They will often trade over the counter through the OTCBB and pink sheets.

BREAKING DOWN 'Penny Stock'

The term itself is a misnomer because there is no generally accepted definition of a penny stock. Some consider it to be any stock that trades for pennies or those that trade for under $5, while others consider any stock trading off of the major market exchanges as a penny stock. However, confusion can occur as there are some very large companies, based on market capitalization, that trade below $5 per share, while there are many very small companies that trade for $5 or more.

The typical penny stock is a very small company with highly illiquid and speculative shares. The company will also generally be subject to limited listing requirements along with fewer filing and regulatory standards.

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RELATED FAQS
  1. Do penny stocks pay dividends?

    Because of the small market capitalization and revenues typical of most penny stocks, there are very few that offer dividends. ... Read Full Answer >>
  2. Can you buy penny stocks in an IRA?

    It is possible to trade penny stocks through an individual retirement accounts, or IRA. However, penny stocks are generally ... Read Full Answer >>
  3. Where can I buy penny stocks?

    Some penny stocks, those using the definition of trading for less than $5 per share, are traded on regular exchanges such ... Read Full Answer >>
  4. Why would a company perform a reverse stock split?

    A company performs a reverse stock split to increase its share price. The desire to increase the share price is usually driven ... Read Full Answer >>
  5. Should I invest in penny stocks or large cap stocks for my retirement portfolio?

    Large-cap stocks are a superior investment option for retirement portfolios compared to penny stocks. Most penny stocks are ... Read Full Answer >>
  6. What are the risks involved with investing in a penny stock?

    Penny stocks are the stocks of companies that trade below $5 and generally off a major market exchange. Penny stocks trade ... Read Full Answer >>
  7. Why is it a bad idea for beginning investors to speculate in penny stocks?

    A penny stock is the stock of a company that trades below $5 and generally trades on the over-the-counter bulletin board ... Read Full Answer >>
  8. What is the difference between a penny stock and a small cap stock?

    A penny stock and a small-cap stock represent the shares of a company with low market capitalizations. However, there is ... Read Full Answer >>
  9. Are secondary capital markets beneficial for society, or are there purely speculative?

    Trading in a secondary market is beneficial to society in various ways. The greatest benefit is that investors in the secondary ... Read Full Answer >>
  10. How is a penny stock created?

    A penny stock, like any other publicly traded stock, is created through a process called an initial public offering, or IPO. ... Read Full Answer >>
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