The SEC defines a penny stock as a stock that trades for less than $5, and therefore is highly speculative. These types of stocks are risky and highly speculative because their lack of liquidity (less people trading in the stock thus less market maker activity), large bid-ask spreads, and limited financial disclosure. Penny stocks often trade over the counter through the OTCBB and pink sheets.

Penny Stock (Wikipedia)

Penny stocks, also known as cent stocks in some countries, are common shares of small public companies that trade at low prices per share. In the United States, the SEC defines a penny stock as a security that trades below $5 per share, is not listed on a national exchange, and fails to meet other specific criteria. In the United Kingdom, stocks priced under £1 are called penny shares. In the case of many penny stocks, low market price inevitably leads to low market capitalization. Such stocks can be highly volatile and subject to manipulation by stock promoters and pump and dump schemes. Such stocks present a high risk for investors, who are often lured by the hope of large and quick profits. Penny stocks in the USA are often traded over-the-counter on the OTC Bulletin Board, or Pink Sheets. In the United States, the Securities and Exchange Commission and the Financial Industry Regulatory Authority (FINRA) have specific rules to define and regulate the sale of penny stocks.

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