Penny Stock
A penny stock is a low-priced share of a small company, defined by the SEC as generally trading below $5 per share.
Despite the name, penny stocks are not necessarily priced in pennies. The SEC generally uses the term for shares trading below $5. Many penny stocks are issued by very small companies and trade over the counter rather than on a major exchange, where listing and reporting requirements are less strict.
Penny stocks attract investors because a low price makes it possible to buy many shares, and small price moves translate into large percentage gains. But a low share price says nothing about whether a stock is cheap. What matters is the company's value compared with its business.
The risks are significant. Penny stocks often have little trading volume, wide bid-ask spreads and limited public information. They are frequent targets of pump-and-dump schemes, in which promoters hype a stock, drive up the price and then sell to late buyers. Brokers must follow special rules and disclosures for some penny stock trades.
Example: a stock at $0.40 rising to $0.50 gains 25%. But if you need to sell 10,000 shares and only a few buyers exist, you may receive far less than the quoted price.