The definition of “penny stock” has changed over time. Originally, companies trading for under $1 per share were considered penny stocks. Today, the SEC defines penny stocks as shares of companies trading for under $5. The term “penny stock” is also meant to describe microcap stocks. Microcap stocks are usually considered companies with market capitalizations (the value of all the company’s outstanding stock) of less than $250 or $300 million, which is considered small or “micro” for a publicly traded company.
Penny stocks usually do not trade on major stock market exchanges, such as the NASDAQ or the New York Stock Exchange. Typically, penny stocks trade on the over-the-counter (OTC) market through the OTC Bulletin Board (OTCBB) and pink sheets. Investing in penny stocks is extremely risky and almost never suitable for retail investors. Despite the enormous amount of risk associated with penny stocks, some financial advisors still recommend them to their clients.
Unlike most large public companies, many penny stock companies do not file periodic or financial reports with the SEC. For this reason, it is often very difficult to obtain information about these companies and it is easier for fraud to occur.
Penny stocks can also be risky because many are new companies with no business track record. Many of these companies have no real assets or operations, and are often not profitable. Many penny stocks are still in the development phase of a new product and do not actually sell a product yet. Sometimes these are drugs that may never be approved by the FDA, natural resource exploration that may never be found, or patent pending technology that may never be granted by the US Patent Office.
Penny stocks are also known for often being illiquid and having volatile share prices. Because of the potential illiquidity and low volume of shares trading, when other investors sell their shares on the market, it can have a large impact on the price of the shares.
Please contact us for a free and confidential case evaluation if you believe that you have lost money due to investing in penny stocks.