Penny Shares

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Category: Shares Types

Penny stocks are common shares of small public companies that trade at less than $1.00. Since many sub $1.00 stocks are thinly traded, and especially those that trade for fractions of one cent, they are targets for price manipulation. For example, an individual or organization buys up hundreds of thousands, or even millions of shares, and then uses web sites, faulty press releases, and e-mail blasts to drive interest to the company. Very often, faulty or misleading information is provided, resulting in investors buying shares in the underlying company. The increased demand pushes the price up, while the original individual or organization doing the "pumping" sells their holdings. The expanding use of the Internet has made penny stock scams easier to perpetuate. Penny stock companies often have low liquidity, making it difficult to sell shares. In extreme cases, investors may encounter difficulty liquidating their positions.

A low priced speculative stock. Although the maximum price at which a security may sell and still be classified as a penny stock is subject to individual interpretation, $1 is probably the most commonly recognized limit. Many penny stocks are traded in the over-the-counter market and on smaller exchanges. Penny stocks are considered highly speculative and rarely are traded on an exchange because so few meet listing requirements. While there is no hard-and-fast definition of what stocks are considered penny stocks, they usually have a share price under $5 and come from a new, un-established company. While most companies issuing penny stocks fail, investing in these stocks can lead to extraordinarily large returns. These types of stocks generally are considered highly speculative and risky because they lack liquidity.

Penny stocks change hands over-the-counter (OTC) and tend to be extremely volatile. Their prices may spike up one day and drop dramatically the next. The fluctuations reflect the unsettled nature of the companies that issue them and the relatively small number of shares in the marketplace. While some penny stocks may produce big returns over the long term, many turn out to be worthless. Institutional investors tend to avoid penny stocks, and brokerage firms typically warn individual investors of the risks involved before handling transactions in these stocks. However, penny stocks are sometimes marketed aggressively to unsuspecting investors. A stock that trades at a very low share price and market capitalization; usually it trades off a major market exchange.