Penny Stock
In the U.S., a penny stock is a common stock that trades for less than $5 a share and are traded over the counter (OTC) through quotation services such as the OTCBB or the Pink Sheets. Although a penny stock is said to be “thinly traded,” share volumes traded daily can be in the hundreds of millions for a sub-penny stock. Legitimate information on penny stock companies can be difficult to find and a stock can be easily manipulated.
Definition
In the U.S. financial markets, the term penny stock commonly refers to any stock trading outside one of the major exchanges (NYSE, NASDAQ, or AMEX), and is often considered pejorative. However, the official SEC definition of a penny stock is a low-priced, speculative security of a very small company, regardless of market capitalization or whether it trades on a securitized exchange (like NYSE or NASDAQ) or an “over the counter” listing service, such as the OTCBB or Pink Sheets. The terms penny stock, microcap stock, small caps, and nano caps are sometimes all used interchangeably, however per the SEC definition, penny stock status is determined by share price, not market capitalization or listing service.
In the UK markets, a penny stock, or penny shares, as they are more commonly called, generally refer to a stock and shares in small cap companies, defined as being companies with a market capitalization of less than £100 million and/or a share price of less than £1 with a bid/offer spread greater than 10%… In the UK Penny Shares are covered by a standard regulatory risk warning issued by the Financial Services Authority(FSA)
In France, a penny stock generally refers to a risky stock with a price of less than 1 euro.
Penny stocks generally have market caps under $500M, trade under $5.00 per share and are considered speculative, particularly those that trade on low volumes over the counter. ”
High-Risk Investments
Many new investors are lured to the appeal of a penny stock due to the low price and potential for rapid growth which may be as high as several hundred percent in a few days. Similarly, severe loss can occur and many penny stocks lose all of their value in the long term. Accordingly, the SEC warns that penny stocks are high risk investments and new investors should be aware of the risks involved. These risks include limited liquidity, lack of financial reporting, and fraud.
Since a penny stock has fewer shareholders, it is less ‘liquid’, meaning it will not trade as many shares per day as a larger company. Any sudden change in demand or supply of stock can lead to a lot of volatility in the stock price. This lack of liquidity can send a stock price soaring up quickly or crashing down quickly. Lack of liquidity and volatility also makes penny stocks much more vulnerable to manipulation by management, market makers, or third parties. A lack of liquidity can also make it extremely difficult to sell a stock, particularly if there are no buyers that day. This can also make the stock extremely difficult to short.
Secondly, unlike NASDAQ or the NYSE, there are only minimal listing requirements for a stock to remain on the OTCBB, namely that they make their filings with the SEC on time. In fact, companies that fail to meet minimum standards on one of the broader exchanges and are delisted often relist on the OTCBB or the Pink Sheets.
Furthermore, a stock trading on the Pink Sheets (recognizable with a .PK suffix) has little to no regulatory or listing requirements whatsoever, at least compared to major markets. There are no minimum accounting standards, change in notification of ownership of shares, and reported other material changes affecting the financial viability of a company, all of which are designed to protect shareholders.
Our main objective is to provide you with as much accurate information as we can collect regarding the companies we provide information on in this site. So you can make an more informed decision regarding your investments!
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