Penny Stocks

DEFINITION A stock that trades at a relatively low price and market capitalization, usually outside of the major market exchanges. These types of stocks are generally considered to be highly speculative and high risk because of their lack of liquidity, large bid-ask spreads, small capitalization and limited following and disclosure. They will often trade over the counter through the OTCBB and pink sheets. The typical penny stock is a very small company with highly illiquid and speculative shares. The company will also generally be subject to limited listing requirements along with fewer filing and regulatory standards.

Penny stocks, also known as cent stocks in some countries, are common shares of small public companies that trade at less than $1.00 (or similarly small amounts in other countries). For example, in the United Kingdom, stocks priced under £1 are called penny shares. In the case of many penny stocks, the market price has previously fallen dramatically and the company's market capitalization is very small compared to the total size of the balance sheet; such stocks are considered to be highly speculative and high risk (being comparable to options that are close to being at-the-money or are out of the money, and which thus will prove to be worthless except in the event of a better-than-expected recovery by the company) but may have a large potential for profit. Penny stocks in the USA are often traded over-the-counter on the OTC Bulletin Board, Pink Sheets, and other institutions such as NASDAQ.

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