Identification

There are different definitions of the term penny stock. Some people apply the name penny stock only to stocks priced at less than $1 per share. The Securities and Exchange Commission (SEC) defines a penny stock as one that is issued by a very small firm and priced at less than $5 per share, typically with limited trading volume (low liquidity). In the United Kingdom, a penny stock is one that costs under one pound per share and has a total market capitalization under 100 million pounds.

Features

Most penny stocks are traded over the counter through quote services (often called pink sheets) rather than on major exchanges like the New York Stock Exchange or NASDAQ. As such, these stocks are not required to file with the SEC and are not subject to many of the disclosure regulations. Over-the-counter listing services do not impose the standards that major exchanges do on listed stocks.

Considerations

If you want to speculate by buying penny stocks, be aware that thorough research is even more important for a high-risk investment than for more conventional stock purchases. There are some common problems you need to watch out for when buying penny stocks. First, penny stocks can be difficult to sell due to low liquidity. Wide price swings are common, especially when a stock draws the attention of speculators. Information about the stock may be difficult to obtain, especially for new companies that don’t yet have a long trading history for you to evaluate. Finally, stocks listed on the pink sheets, in addition to not falling under some SEC regulations, aren’t subject to the standards imposed by major stock exchanges.

Warning

Resources

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