Penny Stock
A low-priced stock, typically trading below $5 per share, often for small companies with thin liquidity and limited reporting requirements.
What is Penny Stock?
A penny stock is a share of a small company trading at a low price, generally defined by the SEC as below $5 per share, though the popular image is stocks trading for literal cents on over-the-counter (OTC) markets or Pink Sheets. Penny stocks are characterized by low market capitalizations, sparse financial reporting, minimal analyst coverage, and thin trading volume, making them highly susceptible to price manipulation schemes such as pump-and-dump. While penny stocks occasionally produce dramatic short-term gains, they carry extreme risks including wide bid-ask spreads, poor liquidity, and a high incidence of fraud.
Example
In 2023, the SEC suspended trading in several OTC penny stocks after identifying suspicious social media campaigns promoting shares in obscure companies. Investors who bought at the peak of the promotion were left holding shares worth a fraction of the purchase price as promoters sold into the hype — a classic pump-and-dump scheme that the SEC warns retail investors about repeatedly.
Source: SEC — Microcap Stock