Penny Stock

Penny stocks are shares of small companies that trade at low prices, typically under $5 per share. These stocks often trade on over-the-counter (OTC) markets rather than major exchanges like the NYSE or NASDAQ, and they're subject to less regulatory scrutiny than larger, listed companies. The appeal of penny stocks lies in their potential for explosive gains. Because they're so cheap, even small absolute price increases represent large percentage gains. Stories of penny stocks going from $0.10 to $10 capture imagination and attract speculative investors hoping to find the next big winner. However, penny stocks are extremely risky for several reasons. Many penny stock companies are startups or financially troubled businesses with questionable prospects. Information about these companies is often limited, making informed investment decisions difficult. Low trading volume means wide bid-ask spreads and difficulty selling positions when you want to exit. Penny stocks are also particularly vulnerable to manipulation. "Pump and dump" schemes involve promoters buying shares, hyping the stock through newsletters and social media, and then selling into the resulting price spike, leaving other investors with worthless shares. The SEC regularly brings enforcement actions against penny stock fraud. The lack of listing requirements for OTC stocks means many penny stock companies don't meet the financial and disclosure standards required by major exchanges. Some are shell companies or outright frauds. Even legitimate penny stock companies face long odds of success - most never graduate to major exchanges. For most investors, penny stocks should be avoided entirely or treated as pure speculation with money you can afford to lose completely. If you're drawn to small companies with growth potential, consider small-cap stocks listed on major exchanges, which offer more transparency and investor protections while still providing growth opportunities.