what is penny stocks

A penny stocks refer to a small company’s stock typically trades for less than $5 per share. Although some penny stocks trade on large exchange such as the NYSE, most penny stocks trade via otc or over the counter though the OTC bulletin board (OTCBB)

In the past, penny stocks were considered any stocks that traded for less than one dollar per share. The U.S, Securities and Exchange Commission or SEC has modified the definition to include all shares trading below five dollar. The SEC is an independent Federal government agency responsible for protecting investor, maintaining fair and orderly functioning of the securities markets.

Penny stocks are usually associated with small companies and trade infrequently meaning they have a lack of liquidity. As a result, investors may find it difficult to sell a stock since there may not be any buyer in the market at that time. Because of the low liquidity, investors might have difficulty finding a price that accurate reflects the market

Due to lack of liquidity, wide bid-ask spreads or price quotes, and small company sizes, penny stocks are considered highly speculative. In other words, investors could lose a sizable amount or all of their investment.