Debt Dictionary

Penny Stock

Investment Dictionary -> Penny Stock

Stock that is traded for less than $5 per share is called a penny stock in the United States. Quotation services are used to trade them over the counter. Examples of such services include The Pink sheets and the OTC bulletin board. Although the price is low, the traded share volumes per a sub-penny stock sometimes reach hundreds of millions. Information that is considered legitimate in regard to the companies trading penny stock is hard to find and therefore, it is easy to manipulate.

Any stock traded outside the main exchanges, such as NASDAQ, NYSE and AMEX, is referred in the U.S. as penny stock.
In the UK, the term penny shares, rather than penny stock is used. It generally points to the shares and stocks traded by cap companies which are small. These are companies having capital of less than £100 million or a share price lower than £1.

The low price and the potential for fast growth lure a lot of investors. The difference in price, for example, may be in several hundred percents for a very short period. On the other hand, a fast drop in value can occur, causing the stocks to reduction in value over long term. The SEC points out that penny stocks represent investments of high risk and new investors should be cautious. The risks comprise of nonexistent financial reporting, limited liquidity and sometimes fraud.

Stock prices can rapidly go up or down due to sudden changes in regard to supply and demand. The low liquidity can make it also very hard to sell the stock and the shorting of the stock can be hard to accomplish. Penny stocks are also vulnerable to manipulation because they lack both volatility and liquidity. They are very often promoted as taking part in dump and pump schemes.

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