What is a penny stock?
In one line: A penny stock is a share in a very small company that trades at a low price, generally under $5 a share by the SEC's definition, often off the major exchanges.
A simple example with numbers
Say a penny stock shows a bid of $0.48 and an ask of $0.52. The Spread is 4 cents.
That sounds tiny. But as a share of the price, it's 0.04 ÷ 0.50 = 8%. Buy at the ask and you'd need the price to climb 8% just to sell back at the price you paid.
Compare a large stock at $150.00 / $150.02: a 2-cent spread is about 0.01%. Same idea, a very different cost.
Where penny stocks trade
Many trade "over the counter" (OTC), not on the New York Stock Exchange or Nasdaq. OTC companies often have to share less information than listed ones. Some are real small businesses; some have little going on at all.
Why it matters
- Thin trading. Low Volume means you may not get out at the price you want.
- Big swings. Moves of 30% or more in a day aren't rare. See Volatility.
- Less information. Fewer filings and little news coverage make it hard to know what's real.
- Scams. The SEC warns about "pump and dump" schemes: someone hypes a cheap stock online, the price shoots up, they sell, and it collapses. Investor alerts are on investor.gov.
A common mistake
Thinking a low price means cheap. A $0.50 stock isn't "cheaper" than a $150 stock in any useful way. What matters is the company's total value (Market cap) and how much you put at risk. Buying 10,000 shares at $0.50 is still a $5,000 position.
A low price per share doesn't lower your risk. Your stop and your size do. The position size calculator works for any share price.
Questions
Are all stocks under $5 penny stocks?
Under the SEC's general definition, most are, but there are exceptions, such as some shares listed on a major exchange that meet certain standards. In everyday talk, "penny stock" usually means a tiny, thinly traded company.
Can you lose more than you put into a penny stock?
If you simply buy shares with cash, the most you can lose is what you paid. Using margin or selling short changes that.
Why are penny stocks so volatile?
Small companies, few shares trading and little information mean a single news item or a burst of buying can move the price a lot.
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