Penny Stock

What Is A Penny Stock?

A penny stock is the stock of a small company that trades at a low price. In the United States, they are sold below $5, while in the United Kingdom, they trade below £1.

Deeper Definition 

Some years ago, the US categorized penny stock as any stock that traded for less than one dollar per share. The Securities and Exchange Commission (SEC) modified the criteria to include all shares trading below five dollars. 

Penny stocks are those that trade at a meager price. As you would expect, investors do not buy or sell them frequently, usually because they lack enough liquidity. The lack of liquidity means that there are not enough buyers and sellers ready to transact on it. As a result, investors may find it difficult to sell or buy the stock quickly.

Companies with penny stocks have very low market capitalization, less than $300 million. Typically, the majority of such shares trade over-the-counter – outside of formal exchanges and without the supervision of an exchange regulator. However, you may sell some on the big stock exchanges, such as the New York Stock Exchange (NYSE).

A penny stock can potentially give massive returns even on a small investment. For instance, you spent $500 to purchase 10,000 shares at $0.05 per share. If the price of the shares rises to $1 one day, you make $10,000. However, several risks are involved in trading them, such as sudden delisting by exchanges and price manipulations.

A penny stock price is below $5 in the United States, and in the United Kingdom, it trades below £1. Usually, new companies with low market capitalization or not performing well offer then.

Penny Stock Example 

A pharmaceutical company that has been in operation for two years and has a market capitalization of $60,000,000 may be listed on the NYSE at $0.06 per share. As more investors purchase it, the price would keep going up and exit the penny stock category if the company performs well.